Question

Suppose that the residents of Colgateville play golf incessantly. In fact, golf is the only thing they spend their money on. They buy golf balls, clubs, and tees. In 2019, they bought 1,000 golf balls for $2.00 each, 100 clubs for $50.00 each, and 500 tees for $0.10 each. In 2020, they bought 1,000 golf balls for $2.50 each, 100 clubs for $75.00 each, and 500 tees for $0.12 each. Using 2010 as the base year, answer the following questions.
a. What was the CPI for 2010?
b. What was the CPI for 2011?
c. What was the inflation rate in 2011?

Answer 1

Answer:

CPI in 2020 =142.7

CPI in 2019 = 100

Inflation rate = 42.7%

Explanation:

Inflation is the increase in the general price level. Inflation erodes the value of money.

Consumer Price Index(CPI ): This is the weighted average price of a basket of goods and services consumed by a typical consumer. It is used to measure the rate of inflation.

The increase in the CPI is taken to be the rate of inflation. For example, the CPI rose to 1.09 from 1.00, this implies an inflation rate of 9% within the time period in focus.

The CPI =

The price of a basket of goods in a current  year ÷ Divided by the price of a basket of goods in  a base year

The consumer price

Value of basket of goods in 2019 = (1000× $2)  + (100× $50) + ( 500× $0.10)= 7050

Value of basket of goods in 2020= (1000× $2.50)  + (100× $75) + ( 500× $$0.12)=10,060

CPI in 2020 = 10,060/7050× 100 =142.7

CPI in 2019 = 100

CPI in 2020 =142.7

CPI in 2019 = 100

The inflation rate =(142.7/100-1 ) × 100 = 42.7%

Note , we assume the CPI for 2019 is 100, since we were not provided with data to compute the price of a basket of good in 2018

CPI in 2020 =142.7

CPI in 2019 = 100

Inflation rate = 42.7%