1.

Suppose that the year you were born someone bought $100 of goods and
services for your baby shower. How much would you guess it would cost
today to buy a similar amount of goods and services? Now find data on the
consumer price index and compute the answer based on it. (You can find the
BLS’s inflation calculator here: http://www.bls.gov/data/
inflation_calculator.htm)

2. The residents of Vegopia spend all of their income on cauliflower, broccoli, and
carrots. In 2010, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli
for $75, and 500 carrots for $50. In 2011, they buy 75 heads of cauliflower for $225,
80 bunches of broccoli for $120, and 500 carrots for $100.
a. Calculate the price of each vegetable in each year.
b. Using 2010 as the base year, calculate the CPI for each year.
c. What is the inflation rate in 2011?
a) Price of cauliflower in 2010 = 100 * $200 = $20000
Price of broccoli in 2010 = 50 * $75 = $3750
Price of carrots in 2010 = 500 * $50 = $25000

Price of cauliflower in 2011 = 75 * $225 = $16875

Price of broccoli in 2011 = 80 * $120 = $9600
Price of carrots in 2011 = 500 * $100 = $50000

b) Base on price in 2010

Price of cauliflower in 2011 = 75 * $200 = $15000
Price of broccoli in 2011 = 80 * $75 = $6000
Price of carrots in 2011 = 500 * $50 = $25000
 Total price in 2011 = $46000
Total price in 2010 = $48750
Total value∈2011
CPI 2011= × 100
Total value∈2010
46000
CPI 2011= ×100=94.36
4 8750

The CPI of the base year will always be 100. Therefore, the CPI in 2010 is 100. The CPI
in 2011 is 94.36
c)
CPI ∈2011−CPI ∈2010
Inflation rate = × 100
CPI ∈2010
94.36−100
= ×100 = -5.64%
100
Since the value is negative, the deflaction rate is 5.64%

https://study.com/academy/answer/the-residents-of-vegopia-spend-all-of-their-income-
on-cauliflower-broccoli-and-carrots-in-2010-they-buy-100-heads-of-cauliflower-for-200-
50-bunches-of-broccoli-for-75-and-500-carrots-for-50-in-2011-they-buy-75-heads-of-
cauliflower-for-225-80-b.html

5. A small nation of ten people idolizes the TV show American Idol. All they
produce and consume are karaoke machines and CDs, in the following amounts:
a. Using a method similar to the consumer price index, compute the percentage
change in the overall price level. Use 2011 as the base year, and fix the basket at 1
karaoke machine and 3 CDs
b. Using a method similar to the GDP deflator, compute the percentage change of
the overall price level. Also use 2011 as the base year
c. Is the inflation rate in 2012 the same using the two methods? Explain why or why
not
https://www.chegg.com/homework-help/questions-and-answers/small-nation-ten-people-
idolizes-tv-show-american-idol-produce-consume-karaoke-machines-cd-q1249662
basket is = 1 karaoke machine and 3 CDs in 2011
basket price = 1*40+3*10 = $70 in 2012
basket price = 1*60+3*12 = $96 taking 2011 as base year CPI in 2011 = 70/70 * 100 =
100 CPI in 2012

6. Which of the problems in the construction of the CPI might be illustrated by

each of the following situations? Explain.
a. the invention of the iPod b. the introduction of air bags in cars c. increased personal
computer purchases in response to a decline in their price d. more scoops of raisins in
each package of Raisin Bran e. greater use of fuel-efficient cars after gasoline prices
increase
1a) The invention of Sony Walkman will not be captured in measurement of inflation
using CPI since CPI is based on fixed basket of commodities evaluated at base and
current year prices. As a result it fails to capture improvements in quality of goods and
services since they cannot be quantified. b) Introduction of air bags again point out the
limitation of using a fixed basket of commodities in CPI. Air bags improve the quality of
life by increasing safety but CPI ignores it since it looks only at total price of car and not
improvement in its quality and features. c) Increased personal computer purchases in
response to lower prices point out the limitation of using a fixed basket of commodities.
Even though consumpution of personal computers has become relatively significant in
terms of total expenditure, CPI assigns lower weights to it since the basket of
commodities is fixed. d) More raisins in each pack of...

7. The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in
manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.
a. By what percentage did the price of a newspaper rise?
b. By what percentage did the wage rise?
c. In each year, how many minutes does a worker have to work to earn enough to
buy a newspaper?
d. Did workers’ purchasing power in terms of newspapers rise or fall?
https://www.transtutors.com/questions/the-new-york-times-cost-0-15-in-1970-and-0-75-
in-1999-the-average-wage-in-manufactur-716623.htm

a) ($2.00-$0.15/0.15)*100% = 1233%
So the price of newspaper rose by 1233%
 b) ($20.42-$3.23/$3.23)*100% = 532.2%
The average wage rose by 532.2%
c) In 1970 a worker took about = 0.15/(3.23/60)= 2.78 minutes to buy a newspaper
In 2009 a worker took about = 2/(20.42/60) = 5.87 minutes to buy a newspaper
d)

9. When deciding how much of their income to save for retirement, should workers
consider the real or the nominal interest rate that their savings will earn? Explain.
In deciding how much income to save for retirement, workers should consider the real
interest rate, since they care about their purchasing power in the future, not the number of
dollars they will have.