To construct a consumer price index (CPI) let the reference basket of g/s be comprised of 500 litres of…

Question:

Transcribed Image Text:

To construct a consumer price index (CPI) let the reference basket of g/s be comprised of

500 litres of water (per year), 300 kilos of apples (per year), and 200 kilos of almonds (per

year). We are holding the reference basket of goods fixed in each year.

Let P = the per-unit market price in each year; Q= the estimated number of units

purchased of a good; the Q for each good is held fixed (constant) for each year.

Based on the above table, and using information from your class notes:

1) Calculate the cost of the reference basket in each year.

2) Calculate the cost of living in each year.

3) Explain the relation between your answers to questions 1 and 2.

4) Calculate the CPI for each year, using 2020 as the base year.

5) Using the CPI for 2020, and the CPI for 2021, calculate the % change in the Cost of

Living from 2020 to 2021.

6) Using the CPI for 2021, and the CPI for 2022, calculate the % change in the Cost of

Living from 2021 to 2022.

7) Using the CPI for 2020, and the CPI for 2021, calculate the % change from 2020 to

2021 of the average price level of the goods that comprise the reference basket.

8) Using the CPI for 2021, and the CPI for 2022, calculate the % change from 2021 to

2022 of the average price level of the goods that comprise the reference basket.

9) Explain the relation between your answers to questions 5 and 7.

10) Explain the relation between your answers to questions 6 and 8.

11) Explain why the CPI in the base year always equals 1.00 (x 100 = 100, by convention). year

2020

2021

2022

Good A

Litres of water

PAX QA

2₺ X 500

4₺ X 500

66 X 500

Good B

Kilos of apples

PBX QB

3₺ X 300

5* X 300

7€ X 300

Good C

Kilos of

almonds

PcX Qc

86 X 200

10% X 200

126 X 200

Cost of Living

Expert Answer:

Answer rating: 100% (QA)

1 Calculate the cost of the reference basket in each year 2020 26500 36300 86200 2021 46500 5300 10700 2022 6500 76300 126200 2 Calculate the cost of

View the full answer