Question

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2014, 2015, and 2016.

The cost of each item in the basket and the total cost of the basket are shown for 2014.

Perform these same calculations for 2015 and 2016, and enter the results in the following table.

	Quantity in Basket	2014		2015		2016
		Price	Cost	Price	Cost	Price	Cost
		(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	5	50	7		11
Calculators	1	100	100	110		140
Large coffees	150	1	150	1		1
Energy drinks	50	2	100	3		4
Textbooks	10	100	1,000	120		150
Total cost			1,400
Price index			100

Points:

Close Explanation

Explanation:

Suppose the base year for this price index is 2014.

In the last row of the table, calculate and enter the value of the CSPI for the remaining years.

Close Explanation

Explanation:

Between 2014 and 2015, the CSPI increased by . Between 2015 and 2016, the CSPI increased by .

Points:

Close Explanation

Explanation:

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.

As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.

The quality and design of calculators improved dramatically from 2014 to 2016. For example, calculators made in 2016 accept memory cards, whereas those made in 2014 do not, but this quality change is hard to measure.

Professors required each student to buy 10 textbooks, regardless of the price.

A new, safe method of memory enhancement became available for purchase.

Answer 1

Quantity in Basket	2014		2015		2016
	Price	Cost	Price	Cost	Price	Cost
	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	5	50	7	70	11	110
Calculators	1	100	100	110	110	140	140
Large coffees	150	1	150	1	150	1	150
Energy drinks	50	2	100	3	150	4	200
Textbooks	10	100	1000	120	1200	150	1500
Total cost			1,400		1,680		2,100
Price index			100		120		150
The cost is calculated by multiplying the price of the concerned year with the quantity. The CSPI has been calculated by dividing the total cost of current year with that of the base year. Between 2014 and 2015, the CSPI increased by 20% (120-100)/100 = 20 Between 2015 and 2016, the CSPI increased by 25% (150-120)*100/120 = 25