Question

Suppose that the residents of Greenland play golf incessantly. In fact, golf is the only thing that they spend their money on. They buy golf balls, clubs, and tees. In 2016, they bought 1,000 golf balls for $2.00 each, 100 clubs for $50.00 each, and 500 tees for $0.10 each.

In 2017, they bought 1,000 golf balls for $2.50 each, 100 clubs for $75.00 each, and 500 tees for $0.12 each.

What is CPI for 2017

Base Year is 2016

Answer 1

The price of the base year bundle in the base year (2016) = 1,000 * $2.00 +  100 * $50 + 500 * $0.10 = $2,000 + $5,000 + $50 = $7,050

The price of the base year bundle in 2017 = 1,000 * $2.50 +  100 * $75 + 500 * $0.12 = $2,500 + $7,500 + $60 = $10,060

Therefore, the % change in the price of the base year bundle from 2016 to 2017 = (10,060 - 7,050)/7,050 * 100 = 3,010/7,050 * 100 = 0.43 * 100 = 43%

Therefore, the CPI would also increase by 43% from 2016 to 2017. Since 2016 is the base year, CPI in 2016 = 100. So, CPI in 2017 = 100 + 43% of 100 = 100 + 43 = 143

Answer: CPI in 2017 = 143