Question

Type the correct answer in each box. Round your answers to two decimal places, if necessary.

Consider a simple economy where the basket of goods used to calculate the CPI contains two items: shirts and pants. The basket consists of 3 sl
and 2 pairs of pants. Each item increases in price by $1 in year 2. Use this information to complete the table and calculate the CPI.
Year Price of a Shirt Price of a Pair of Pants
year 1
$25
$20
year 2
$
The CPI for year 2 is

Answer 1

The prices of a shirt and a pair of pants in year 2 are $26 and $21, respectively, and the calculated CPI for year 2 is 104.35.

Step-by-step explanation:

The student is tasked with calculating the Consumer Price Index (CPI) of a simple economy with two items: shirts and pants, after their prices have increased by $1 in year 2.

• Steps for Calculation:

Compute the total cost of the basket for year 1: (3 shirts × $25) + (2 pants × $20)

= $75 + $40 = $115.

For year 2, the prices increase by $1 for each item, hence: (3 shirts × ($25 + $1)) + (2 pants × ($20 + $1))

= (3 × $26) + (2 × $21)

= $78 + $42

= $120.

The CPI for year 1 (base year) is always 100, and the CPI for year 2 can be calculated as: CPI Year 2 = (Cost of basket in Year 2 / Cost of basket in Year 1) × 100

= ($120 / $115) × 100

= 104.35 (rounded to two decimal places).

The prices of a shirt and a pair of pants in year 2 are $26 and $21, respectively, and the CPI for year 2 is 104.35.