Table 24-2

Question

The following table pertains to Wrexington, an economy in which the typical consumer's basket consists of 20 pounds of meat and 10 toys.
Year

Price of Meat

(Dollars per pound)


Price of a Toy

(Dollars per toy)
1 3 2
2 1 7
3 4 5

Refer to Table 24-2. If the base year is Year 1, then the CPI in Year 2 was
a. 100.
b. 90.
c. 88.9.
d. 112.5.

Answer 1

To calculate the Consumer Price Index (CPI) for Year 2 with Year 1 as the base year, we will use the following formula:

\[ CPI = \left( \frac{\text{Cost of basket in current year}}{\text{Cost of basket in base year}} \right) \times 100 \]

1. Calculate the cost of the basket in Year 1 (base year):

   • Cost of meat: 20 pounds × $3/pound = $60
   • Cost of toys: 10 toys × $2/toy = $20
   • Total cost in Year 1 = $60 + $20 = $80

2. Calculate the cost of the basket in Year 2:

   • Cost of meat: 20 pounds × $1/pound = $20
   • Cost of toys: 10 toys × $7/toy = $70
   • Total cost in Year 2 = $20 + $70 = $90

3. Calculate the CPI for Year 2: \[ CPI = \left( \frac{90}{80} \right) \times 100 = 112.5 \]

So, the CPI in Year 2 is 112.5.

The correct answer is d. 112.5.