Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
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Chapter 24, Problem 3PA

Subpart (a):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The percentage change in price of the good is calculated by using the following formula:

Percentage change in price =PricePresent yearPricePrevious yearPricePrevious year×100 (1)

Substitute respective values in equation (1) to calculate the percentage price change for the tennis ball.

Percentage change in priceTennis ball=222×100=0%

The percentage change in price for Tennis ball is 0.

Substitute respective values in equation (1) to calculate the percentage price change for the golf ball.

Percentage change in priceGolf ball=644×100=50%

The percentage change in price for golf ball is 0.

Substitute respective values in equation (1) to calculate the percentage price change for the galorade.

The percentage change in price of golf balls is 50%.

Percentage change in priceGatorade=211×100=100%

The percentage change in price of bottle of gatorade is 100%.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services which includes food and energy prices.

Inflation rate: It is a measure of the percentage change in the price index from the preceding period.

Subpart (b):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

The base year is 2017. The consumer price index (CPI) can be calculated by using the following formula.

CPI      =((Present price1×Quantity1)+(Present price2×Quantity2)+...+(Present pricen×Quantityn))((Base year price1×Quantity1)+(Base year price2×Quantity2)+...+(Base year pricen×Quantityn))×100 (1)

Substitute the respective values in equation (1) to calculate the CPI for the year 2017.

CPI2017=(2×100)+(4×100)+(1×200)(2×100)+(4×100)+(1×200)×100=200+400+200200+400+200×100=800800×100=100

CPI in the year 2017 is 100.

Substitute the respective values in equation (1) to calculate the CPI for the year 2018.

CPI2018=(2×100)+(6×100)+(2×200)(2×100)+(4×100)+(1×200)×100=200+600+400200+400+200×100=1,200800×100=150

CPI in the year 2018 is 150.

The overall change in price using CPI is calculated as follows:

Overall percentage change in price =CPIPresentCPIPreviousCPIPrevious×100=150100100×100=50%

Thus, the overall change in price is 50%.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services which includes food and energy prices.

Inflation rate: It is a measure of the percentage change in the price index from the preceding period.

Subpart (c):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

When the bottle of Gatorade increased in size from 2017 to2018, its value would be greater than before. As a result, this would lower the estimation of inflation rate.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services which includes food and energy prices.

Inflation rate: It is a measure of the percentage change in the price index from the preceding period.

Subpart (d):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (d):

Expert Solution
Check Mark

Explanation of Solution

More flavors enhance consumers’ well-being which would result in change in quality and thus would lower the estimate of the inflation rate.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services which includes food and energy prices.

Inflation rate: It is a measure of the percentage change in the price index from the preceding period.

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