The table above gives the purchases of an average consumer in a small economy. (These consumers purchase only loaves of bread and jugs of soda.) Suppose 2010 is the reference base period
a. What quantities are in the CPI market basket?
b. What is the cost of the CPI market basket using 2010 prices?
c. What is the cost of the CPI market basket using 2011 prices?
d. What is the CPI in 2011?
a. The quantities in the CPI market basket are the 2010 quantities because 2010 is the reference base period. So, the quantities are 20 loaves of bread and 20 jugs of soda.
b. The cost of the CPI basket using 2010 prices is (20 loaves × $3 ) + (20 jugs × $2 ) = $100.
c. The cost of the CPI basket using 2011 prices is (20 loaves × $4 ) + (20 jugs × $1.50 ) = $110. Note that the quantities used in this calculation are the quantities in the CPI market basket.
d. The CPI in 2011 equals 100 multiplied by the cost of the CPI market basket at 2011 prices divided by the cost of the CPI basket at 2010 (base period) prices. The CPI equals 100 × ($110)/($100 ) = 110.
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A. $25 B. $30 C. $20 D. $40
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