Question

A small nation of ten people idolizes the TV show “The Voice”. All they produce and consume are karaoke machines and CDs, in the following amounts:

Karaoke Machines

CDs



Quantity Produced

(in thousands)

Price of each Karaoke Machine

Quantity Produced

(in thousands)

Price of each CD



2017

10

$40

30

$10

2018

12

$60

50

$12

The population of the economy is 10000 in 2017 and it increased to 15000 in 2018.Using the CPI, compute the percentage change in the overall price level. Use 2017 as the base year and fix the basket at 1 karaoke machine and 3 CDs.

Answer 1

To compute the CPI, we first need to calculate the total cost of the basket in both years:

2017: (10 x $40) + (30 x $10) = $400 + $300 = $700

2018: (12 x $60) + (50 x $12) = $720 + $600 = $1320

Using 2017 as the base year, the CPI in 2017 is 100 (by definition). To calculate the CPI in 2018, we divide the cost of the basket in 2018 by the cost of the basket in 2017, and multiply by 100:

CPI in 2018 = (1320/700) x 100 = 188.57

Therefore, the percentage change in the overall price level is:

% change in price level = (CPI in 2018 - CPI in 2017) / CPI in 2017 x 100

% change in price level = (188.57 - 100) / 100 x 100

% change in price level = 88.57%

So, the overall price level increased by 88.57% from 2017 to 2018.