Answer:
a.
Inflation = (2017 price of basket - 2016 price of basket) / 2016 price of basket
2016 price of basket = 1 + 4 = $5
2017 price of basket = 2 + 8 = 10
Inflation
= (10 - 5) / 5
= 100%
Both Megan and Larry would be unaffected by the changes in prices because the prices doubled for both of them.
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b. Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80.
Market basket in 2017 = 2 + 4.8 = $6.80
Inflation
= (6.8 - 5) / 5
= 36%
Larry will be better off because the price of beans increased by 100% which is more than the inflation rate of 36%.
Megan's price increase = (4.8 - 4)/4 = 20%.
Inflation is 36%.
Megan will be worse off as inflation is higher than the increase in price of rice.
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c. Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60.
Market Basket in 2017 = 2 + 1.6 = $3.60
Inflation = (3.6 - 5)/5 = -28%
Larry will be better off because his prices have risen while general inflation has fallen.
Megan's price decrease = ( 1.6 - 4)/4 = -60%. Inflation was -28%.
Megan will be worse off because inflation decreased less than her prices did.
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d. What matters more to Larry and Megan?
The relative price of rice and beans
This matters more to them because a change in prices of the commodities they sell could either benefit them or give them a loss regardless of the inflation rate.