Question

The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2013, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for 500 carrots. In 2014, they spend a total of $225 for 75 heads of cauliflower, $120 for 80 bunches of broccoli, and $100 for 500 carrots.

a. Calculate the price of one unit of each vegetable in each year.

b. Using 2013 as the base year, calculate the CPI for each year.

c. What is the inflation rate in 2014?

Answer 1

a ) Ans:

2013			2014
	Quantity	Price ( $)	Quantity	Price ( $)
Cauliflower	100	2.00	75	3.00
Broccoli	50	1.50	80	1.50
Carrots	500	0.10	500	0.20

Price = Total money spend on the good / Quantity of that good

b ) Ans: 2013 CPI = 100 and 2014 CPI = 136.92

Explanation:

Cost of the market basket in 2013 = ( $2.00 * 100 ) + ( $1.50 * 50 ) + ( $0.10 *500) = 200 + 75 + 50 = 325

Cost of the market basket in 2014 = ( $3.00 * 100 ) + ( $1.50 * 50 ) + ( $0.20 *500) = 225 + 120 + 100 = 445

CPI = (current year cost / Base year cost ) *100

2013 CPI = ( 325 / 325 ) *100 = 100

2014 CPI = ( 445 / 325 ) *100 = 1.3692 *100 = 136.92

c ) Ans: Inflation rate in 2014 is 36.92

Explanation:

Inflation rate = {( 2014 CPI - 2013 CPI) / 2013 CPI} *100

= {( 136.92  - 100 ) / 100 } *100

= ( 36.92 / 100 ) *100

= 0.3692 *100

= 36.92