Question

The people who live on​ Shangri-La Island consume only rice and fish. Last​ year, which was the reference base​ year, the price of rice was ​$3 a​ pound, the price of fish was ​$2 a​ pound, and the average urban household spent ​$9 on rice and ​$6 on fish. This​ year, the price of rice is ​$2 a pound and the price of fish is ​$10 a pound. What is the CPI in the current​ year?

Answer 1

The CPI for the current year on Shangri-La Island, with price changes in rice and fish, is calculated to be 240. This indicates a significant increase in the cost of the market basket compared to the base year.

Step-by-step explanation:

The student is asking about calculating the Consumer Price Index (CPI) for the current year based on a hypothetical situation where the economy only consumes rice and fish. To calculate the CPI, we use the formula:

CPI = (Cost of market basket in current year / Cost of market basket in base year) x 100

First, we calculate the cost of the market basket in the base year (last year):

• Cost of rice: 3 (quantity of rice) x $3 (price of rice per pound) = $9
• Cost of fish: 3 (quantity of fish) x $2 (price of fish per pound) = $6

Total cost of the market basket in the base year = $9 (rice) + $6 (fish) = $15

Next, we calculate the cost of the market basket in the current year using the quantities from the base year but with current prices:

• Cost of rice: 3 (quantity of rice) x $2 (current price of rice per pound) = $6
• Cost of fish: 3 (quantity of fish) x $10 (current price of fish per pound) = $30

Total cost of the market basket in the current year = $6 (rice) + $30 (fish) = $36

Now we use these values to calculate the CPI for the current year:

CPI = ($36 / $15) x 100 = 240

So, the CPI in the current year is 240, indicating that the cost of the market basket has increased significantly since the base year.