Asked by Mary

As an example of a price index, consider the A.C.D.P.I. (a fictitious price index). The associated basket of goods is:

Good Price
Coffee $8/lb.
Bread $1/loaf
Tea $15/lb.
Aspirin $2/bottle
Cola $6/case

A. If the price of coffee doubles, what is the resulting percentage change in the price level? (2 points)
16/8*100=200%
B. If the price of bread doubles, what is the resulting percentage change in the price level? (2 points)
2/1*100=200%
C. Why is the effect of a 100% increase in the price of coffee so much greater than the effect of a similar change in the price of bread? (4 points)


The problem I'm having is with part C. I don't see a difference in price when coffee doubles or when bread doubles. I see that there is a 200% increase for both

Answers

Answered by Avery
What you just did was calculate what the percent change for both prices was. What you need to do is divide the summation of all prices*quantities for new prices and divide that by old prices (and then multiply that number by 100) to get the percentage change in price level
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