Question

Select the correct answer.
Henry is an economist and wants to understand the relationship between inflation and consumer spending habits. For his research, he needs the Consumer Price Index for 2014 and the inflation rate. Based on the prices of goods given, what will he find to be the CPI and inflation rate for 2014? Assume that a consumer’s basket for three consecutive years consists of the following:

Year

Price of an Apple

Number of Apples Consumed

Price of an Orange

Number of Oranges Consumed

2012

2

3

3

2

2013

3

2

4

1

2014

5

1

5

2

Consider 2012 to be the base year.

A.
100 CPI, 49.56 percent inflation
B.
165 CPI, 45.40 percent inflation
C.
185 CPI, 55.35 percent inflation
D.
175 CPI, 60.56 percent inflation
E.
125 CPI, 50.60 percent inflation

Answer 1

To determine the Consumer Price Index (CPI) for 2014 and the inflation rate, we will first calculate the total cost of the consumer basket for the base year (2012) and for the year 2014. The CPI is calculated using the formula:

\[
\text{CPI} = \left(\frac{\text{Cost of Basket in Current Year}}{\text{Cost of Basket in Base Year}}\right) \times 100
\]

Let’s calculate the Cost of Basket for each year:

### Step 1: Calculate the Cost of Basket for Each Year

**Base Year (2012):**
- Apples: 3 apples * $2/apple = $6
- Oranges: 2 oranges * $3/orange = $6
- Total cost for 2012 = $6 + $6 = $12

**For 2014:**
- Apples: 1 apple * $5/apple = $5
- Oranges: 2 oranges * $5/orange = $10
- Total cost for 2014 = $5 + $10 = $15

### Step 2: Calculate the CPI for 2014

Using the formula for CPI:

\[
\text{CPI} = \left(\frac{15}{12}\right) \times 100 = 125
\]

### Step 3: Calculate the Inflation Rate

The inflation rate is calculated using the formula:

\[
\text{Inflation Rate} = \left(\frac{\text{CPI}_{\text{current}} - \text{CPI}_{\text{previous}}}{\text{CPI}_{\text{previous}}}\right) \times 100
\]

In this case, we will consider CPI for the previous year 2013, which we will calculate now.

**For 2013:**
- Apples: 2 apples * $3/apple = $6
- Oranges: 1 orange * $4/orange = $4
- Total cost for 2013 = $6 + $4 = $10

Now, calculate CPI for 2013:

\[
\text{CPI}_{2013} = \left(\frac{10}{12}\right) \times 100 \approx 83.33
\]

Now calculate the inflation rate from 2013 to 2014:

\[
\text{Inflation Rate} = \left(\frac{125 - 83.33}{83.33}\right) \times 100 \approx 50.00\%
\]

### Conclusion

Based on the calculations:
- **CPI for 2014** is 125
- **Inflation Rate** is approximately 50.00%

Thus, the correct answer is:

**E. 125 CPI, 50.60 percent inflation**