Final answer:
To adjust the 1970 price of marijuana to 2017 dollars for inflation, we divide the 1970 price by the ratio of the 1970 price index to the 2017 index, yielding an inflation-adjusted cost of approximately $64.52. The nearest answer choice is (b) $64.
Step-by-step explanation:
The student's question is related to understanding inflation and how to calculate the real cost of an item from the past in today's dollars. Specifically, it asks what the real cost of an ounce of marijuana in 1970 would be in 2017 dollars, assuming the price index in 1970 was 15.5.
A common tool to compare prices across time is the Consumer Price Index (CPI), which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. To find the real cost in 2017 dollars, we need to adjust the 1970 price for inflation. According to the information provided, the purchasing power of $1 in 2017 is the same as 18 cents in 1970. We can represent this as a price index with the 2017 index being 100 and the 1970 index being 18.
Here's the calculation using the price index:
- First, calculate the ratio of the 1970 price index to the 2017 price index (15.5/100).
- Then, adjust the 1970 price ($10) to 2017 dollars by dividing by this ratio.
- The real cost in 2017 dollars is therefore $10 / (15.5/100) = $64.52 (approximated to the nearest cent).
Hence, the answer is (b) $64.