Question

Suppose that the residents of Proteinland spend all of their incomes on ham, chicken, and roast beef. In 2006, they buy 50 pounds of ham for $150, 35 pounds of chicken for $140, and 100 pounds of roast beef for $500. In 2007, they buy 35 pounds of ham for $140, 50 pounds of chicken for $200, and 100 pounds of roast beef for $600.

1. Calculate the price of each meat in each year.
2. Using 2006 as the based year, calculate the CPI for each year.
3. What is the inflation rate for 2007?

Answer 1

a) In 2006:

50 pounds of ham for $150 which means $3 per pound

35 pounds of chicken for $140 which means $4 per pound

100 pound of roast beef for $500 which means $5 per pound

In 2007:

35 pounds of ham for $140 which means $4 per pound

50 pounds of chicken for $200 which means $4 per pound

100 pound of roast beef for $600 which means $6 per pound

b) CPI in 2006 = Spending on Ham + Spending on Chicken + Spending on roast beef = $150 + $140 + $500 = $790

CPI in 2007 = Spending on Ham + Spending on Chicken + Spending on roast beef = $140 + $200 + $600 = $940

c) Inflation rate in 2007 = [(CPI in 2007 - CPI in 2006) / CPI in 2006] * 100 = [(940 - 790) / 790] * 100 = 18.98%