ECO 402 – Microeconomics

 Name: Amjad Khan

 Assignment No: 1
 Student ID: bc180400740

The Case:
The high cost of a nutritious diet can worsen nutrition outcomes, especially in low-income
households. Vegetables are an important part of human diet due to the provision of
vitamins, minerals, proteins, and carbohydrates. In Pakistan, Consumer Price Index (CPI)
is used to reveal the level of Inflation. The monthly price review shows the prices of 53
items in 18 major cities of Pakistan. At present, the increase in the price of vegetables has
affected the domestic budget. Tomatoes, onions, and vegetable ghee are inevitable food
ingredient in the cooking. The information about their nominal prices in Faisalabad and
CPI from year 2017 to year 2019 is giver below:

Items Unit Year Nominal CPI Real Price

Price In
Faisalabad

Tomato Kg Oct- 113.75 337.71 ?

2017

Oct- 73.13 240.62 ?

2018

Oct- 92.00 210.34 ?

2019

Onion Kg Oct- 81.88 491.92 ?

2017

Oct- 36.88 216.58 ?

2018

Oct- 78.00 464.37 ?

2019
 Vegetable Kg Oct- 135.88 143.26 ?
Ghee 2017

Oct- 144.63 148.48 ?

2018

Oct- 178.85 173.41 ?

2019
Data Source: Monthly review on price indices. Statistics Division, Government of Pakistan
Requirements:
Keeping in mind the above scenario, solve the following questions. a. By assuming Oct-2017 as
base year, find real price of tomato, onion and vegetable ghee in each year. b. If base year bundle
have 5 kg tomato, 5 kg onion and 3 kg vegetable ghee than find Laspeyres index by assuming
oct-2017 as base year and oct-2019 as current year.

Solution no 1:
Formula: (CPI Base Year / CPI Current Year) x Nominal Price Current Year

Items Unit Year Nominal Price In CPI Real Price

Faisalabad

Tomato Kg Oct- 113.75 337.71 337.71/337.71x113.75=113.75

2017

Oct- 73.13 240.62 337.71/240.62x73.13=102.64

2018

Oct- 92.00 210.34 337.71/210.34x92.00=147.71

2019

Onion Kg Oct- 81.88 491.92 491.92/491.92x81.88=81.88

2017

Oct- 36.88 216.58 491.92/216.58x36.88=83.77

2018
 Oct- 78.00 464.37 491.92/464.37x78.00=82.63
2019

Vegetable Kg Oct- 135.88 143.26 135.88/143.26x135.88=135.88

Ghee 2017

Oct- 144.63 148.48 135.88/148.48x144.63=139.55

2018

Oct- 178.85 173.41 135.88/173.41x178.85=147.75

2019

Solution no 2:
Formula: (Current Year Price x Quantity) / (Base Year Price x Quantity) x 100

Items Unit Year Nominal Price Layspers Price Index

Tomato 5Kg Oct-2017 113.75 210.34*5/337.71*5=15.57

Oct-2019 102.68

Onion 5Kg Oct-2017 491.92 464.37*5/491.92*5=23.61

Oct-2019 464.37

Vegetable Ghee 3Kg Oct-2017 143.26 173.41*3/143.26*3=10.89

Oct-2019 173.41