Posted by shelby on .
Suppose that the residents of Veggieland spend all of their income on cauliflower, broccoli, and carrots. In 1998 they buy 100 heads of cauliflower for $200,50 bunches of broccoli for $75, and 500 carrots for $50. In 1999 they buy 75 heads of cauliflower for $225,80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 1998, what is the CPI in both years? What is the inflation rate in 1999?
As this is your third post....
First calculate the "weight" of each good. Total spending in the base year is cauliflower=200, broccoli=75, carrots=50, total=325. So, the weight for cauliflower is 200/325=.61538 Calculate the weights for broccoli and carrots.
Next, calculate prices in the base year and next year. In 1998 100 heads of cauliflower were purchased for $200. So, the price per head is $2. The price per head in 1999 is 225/75=$3. Calculate the prices for broccoli and carrots.
Now calculate the percentage change in prices. Cauliflower went from $2 to $3, a 50% increase. Multiply this by the cauliflower weight. I get .30769. Do the same for broccoli and carrots. Add up the weighted changes of the three goods. This is the overall weighted average increase in prices. I get .462
In CPI-speak, the base year is always 100.0 So, the CPI for 1999 is 146.2
Thank you so much for all your help!!!!!!!! :)