Question

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

Answer 1

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