Question

Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of $1, 929 in 1989 and that the CPI index was 113 in 1989. If the CPI index was 211 in 2009, then the cost of tuition in 2009, as the result of inflation, would equal $ (Enter your response rounded to the nearest whole number.) Suppose that the actual average cost of tuition in 2009 was $6, 137. Relative to the expected cost computed above, the cost of tuition increased by the amount of inflation.

Answer 1

Using the Consumer Price Index, the expected cost of tuition in 2009, adjusted for inflation, would be approximately $3,588. However, the actual cost was $6,137, showing a 71.0% increase above the inflation-adjusted expectation.

Step-by-step explanation:

To compare tuition prices between 1989 and 2009 using the Consumer Price Index (CPI), we first calculate the expected cost of tuition in 2009 by considering the change in CPI from 1989 to 2009. Using the given data, the CPI was 113 in 1989 and 211 in 2009, and the cost of tuition in 1989 was $1,929.

The formula to adjust for inflation is:

Cost in Later Year = (Cost in Earlier Year) × (Later Year CPI / Earlier Year CPI)

Therefore, the inflation-adjusted cost of tuition in 2009 would be:

$1,929 × (211 / 113) ≈ $3,588 (rounded to the nearest whole number)

However, the actual cost of tuition in 2009 was $6,137. To find the percentage increase due to inflation, we use:

Percentage Increase = ((Actual Cost - Expected Cost) / Expected Cost) × 100

Plugging in the values, we get:

Percentage Increase = (($6,137 - $3,588) / $3,588) × 100 ≈ 71.0%

Thus, the tuition increased by 71.0% more than the expected cost due to inflation alone.