Question

Three goods are consumed in an economy during years 1 and 2. The table shows prices (P1 and P2) for each good, and it shows the market basket that is used to calculate the consumer price index. The base year is year 1.

Good	P1	P2	Basket
Milk (gallons)	$4	$4.20	12
Beef (pounds)	$2	$2.20	20
Carrots (bags)	$3	$3.60	8

Enter numbers in each blank, rounded to two decimal places as necessary.

The value of the CPI in year 1 is  and the value of the CPI in year 2 is

Answer 1

Goods	P1 (Base Price)	Basket (B)	Cost (P1*B)	P2 (Current Price)	Basket (B)	Cost (P2*B)
Milk	4	12	48	4.2	12	50.4
Beef	2	20	40	2.2	20	44
Carrot	3	8	24	3.6	8	28.8
Total Cost	$112	$123.2

The Base year cost (BY) is 112. And the Current year (CY) year cost if 123.2.

Thus, the CPI in the year 2 is:

The CPI thus in the Period 2 is 110.

The CPI in the year 1 is (assuming the CY=BY):

The CPI thus in the Period 1 is 100.

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