Question

Answer the following questions about the CPPI (Couch Potato Price Index)

2014 2015

Good Q P Q P

Beer 4 $5.00 3 $6.00

Chips 8 $2.00 8 $2.50

Cable TV 1 $36.00 2 $32.00

Soda Pop 2 $2.00 1 $2.25

Pizza 5 $11.00 3 $16.00

a) Calculate the inflation rate based on this index, using 2014 as the base year Give answer as a % and round to 2 decimal places. (1 point)

b) Explain why, based on the figures above, why the inflation figure you calculated in (a) may overstate the impact of higher prices on the consumer. (Not just a generic answer here, be specific from this data) (1 point)

Answer 1

1)		computing CPI(2014)
	GOOD	Q	P	EXPENDITURE (P*Q)
	BEER	4	5	20
	CHIPS	8	2	16
	CABLE TV	1	36	36
	SODA	2	2	4
	PIZZA	5	11	55
		NOMINAL EXPENDITURE		$131
		BASE YEAR IS 2014
	FOR 2015( EXPENDITURE AT BASE QUANTITIES)
	GOOD	P	Q	EXPENDITURE
	BEER	6	4	24
	CHIPS	2.5	8	20
	CABLE TV	32	1	32
	SODA	2.25	2	4.5
	PIZZA	16	5	80
			SUM	$160.50
	CPI = 160.5/138 = 1.163
	CONVENTIONALLY 1.1630*100= 116.30
	INFLATION RATE = 116.30-100= 16.30%
2)	THE RATE SHOWN HERE DEPICTS THE HIGHER INFLATION RATE FROM 2014 TO 15
	BUT THERE IS A SLIGHT DIFFERENCE IN INDIVIDUAL PRICES EVEN THERE IS FALL IN PRICE OF CABLE TV