Question

The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2016, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for 500 carrots. In 2017, they spend a total of $225 for 75 heads of cauliflower, $120 for 80 bunches of broccoli, and $100 for 500 carrots.

a. Calculate the price of the basket for each year.
b. Using 2006 as the base year, calculate the CPI for each year.
c. What is the inflation rate for 2007?

Answer 1

A) In order to build a CPI basket I will use 2016 as a base year and the CPI basket will contain half of the products that Vegopians purchased during the year:

CPI basket base year = 50 heads of cauliflower ($100) + 25 bunches of broccoli ($37.50) + 250 carrots ($25) = $162.50

CPI basket 2017 = 50 heads of cauliflower ($150) + 25 bunches of broccoli ($37.50) + 250 carrots ($50) = $237.50

B) CPI basket base year = 100

CPI basket 2017 = 146.15 [= (237.50 / 162.50) x 100]

C) the inflation rate for 2017 is 46.15%