Use the data below related to price of some goods and services to answer the following requirements:

Question

Use the data below related to price of some goods and services to answer the following requirements:

1. 10 units of food, the price of each unit is $24
2. Rent of apartment, $1500 per month
3. Gasoline, car insurance, and maintenance, $300
4. Phone service (basic service plus 10 long-distance calls), $100

In the year following the base year, the survey takers determine that pizzas have risen to $30 each, apartment rent is $1620, gasoline, car insurance, and maintenance have risen to $340, and phone service has dropped in price to $80.

1. Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year.                    

The family’s nominal income rose by 10 percent between the base year and the subsequent year. Are they worse off or better off in terms of what their income is able to buy?          

Answer 1

Calculate the CPI for the base year as follows:

10 x food at $24 each = 240

Rent = 1500

Gas, insurance and maintenance = 300

Phone Service = 100

Total Cost of basket = 2140

CPI in base year = (2140 / 2140) x 100 = 100

Calculate the CPI in the following year:

9 x food at $24 each = 216

1 x food (pizza) at $32 = 32

Rent = 1620

Gas, insurance and maintenance = 340

Phone = 80

Total cost of basket = 2288

CPI in year 2 = (2288 / 2140) x 100 = 106.92

Inflation is calculated by finding the % change in CPI between the base year and the subsequent year

Inflation = [(106.92 - 100) / 100] x 100 = 6.92%

If the family income rises by 10%, this is greater than the rate of inflation so they are still better off as they can afford to buy 10% more goods whereas goods have risen by less than 10%.