Question

Problems and Applications Q3

Suppose that people consume only three goods, as shown in this table:

	Tennis Balls	Golf Balls	Bottles of Gatorade
2017
Price	$2	$4	$1
Quantity	100	100	200
2018
Price	$2	$6	$2
Quantity	100	100	200

Complete the following table by computing the percentage change in price for each of the three goods.

	Tennis Balls	Golf Balls	Bottles of Gatorade
Percentage Change ___		______    ______

Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is.

True or False: If you were to learn that a bottle of Gatorade increased in size from 2017 to 2018, that information would lower your estimation of the inflation rate.

True

False

True or False: If you were to learn that Gatorade introduced new flavors in 2018, that would imply that the inflation rate you estimated is overstated.

True

Answer 1

1. The percentage change in the price of tennis balls is (2 – 2)/2 × 100% = 0%

The percentage change in the price of golf balls is (6 – 4)/4 × 100% = 50%.

The percentage change in the price of Gatorade is (2 – 1)/1 × 100% = 100%.

2. The cost of the market basket in 2017 is ($2 × 100) + ($4 × 100) + ($1 × 200) = $200 + $400 + $200 = $800.

The cost of the market basket in 2018 is ($2 × 100) + ($6 × 100) + ($2 × 200) = $200 + $600 + $400 = $1,200

The percentage change in the cost of the market basket from 2017 to 2018 is (1,200 – 800)/800 × 100% = 50%.

3. true, It would lower the estimation of the inflation rate because the value of a bottle of Gatorade is now greater than before.

4. true, it also lower the estimate of the inflation rate because of a change in quality