Question

In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements is correct?

a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.
b. When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.
c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.
d. When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.

Answer 1

The correct option is option D which is When 2006 is chosen as the base year, the inflation rate is 50 percent in 2007.

Step-by-step explanation:

For the fixed basket, the price is 2006 is given as

Basket Price =$3*10+$5*6=$30+$30=$60

Now the price of basket in 2007 is given as

Basket Price=$5.40*10+$6*6=$54+$36=$90

Now as the inflation rate is given as

Price in 2007/Price in 2006=$90/$60=1.5

this indicates that the prices have become 1.5 times or have increase 50% Thus the inflation rate is 50%