Question

Suppose that the residents of Colgateville play golf incessantly. In fact, golf is the only thing they spend their money on. They buy golf balls, clubs, and tees. In 2019, they bought 1,000 golf balls for $2.00 each, 100 clubs for $50.00 each, and 500 tees for $0.10 each. In 2020, they bought 1,000 golf balls for $2.50 each, 100 clubs for $75.00 each, and 500 tees for $0.12 each. Using 2010 as the base year, answer the following questions.

a. What was the CPI for 2019?
b. What was the CPI for 2020?
c. What was the inflation rate in 2020?

Answer 1

a. The CPI for 2019 is 100 because 2019 is the base year

b. CPI = Cost of basket of goods at current year prices/Cost of basket of goods at base year prices * 100

CPI = (1,000*$2.50) + (100*$75) + (500*$0.12) / (1,000$2.50) + (100*$50) + (500*$0.10) * 100

CPI = 10,060/7,550 * 100

CPI = 133.2450331125828

CPI = 133.25

c. Inflation rate = CPI in the current rate - CPI in previous year / CPI in previous year * 100

Inflation rate = 133.25 - 100/133.25 * 100

Inflation rate = 0.24953096 * 100

Inflation rate = 24.95%