Question 3 In Crabby land, there are only 3 goods: Burgers, Patties, and Pizza. The following table shows the prices and quantities produced of these goods in 1990, 2000, and 2010: Burgers Patties Pizza Price 2.00 7.00 0.70 1990 Quantity 500 300 300 Price 1.00 10.00 4.00 2000 Quantity 600 200 200 Price 1.10 10.50 0.75 2010 Quantity 690 110 420 a) A "market bundle" for a typical family is deemed to be 5 burgers, 3 patties, and 4 pizzas. Compute the consumer price index (CPI) for each of the three years, using 1990 as the base year. b) What was the rate of inflation from 1990 to 2000, using the CPI you calculated in (a)? c) Compute the CPI for each of the three years, using 2000 as the base year instead of 1990 but using the same "market bundle." d) What was the rate of inflation from 2000 to 2010, using the CPI you calculated in (c)? Is it the same as your answer to (b)? e) Now suppose that a new market bundle is defined; the "market bundle" is now 6 burgers, 2 patties, and 4 pizzas. Compute the CPI for the three years, using this "market bundle" and using 1990 as the base year. f) What was the new rate of inflation from 2000 to 2010, using the CPI you calculated in (e)? Explain why it is different from your answer to (b)?
Question 3 In Crabby land, there are only 3 goods: Burgers, Patties, and Pizza. The following table shows the prices and quantities produced of these goods in 1990, 2000, and 2010: Burgers Patties Pizza Price 2.00 7.00 0.70 1990 Quantity 500 300 300 Price 1.00 10.00 4.00 2000 Quantity 600 200 200 Price 1.10 10.50 0.75 2010 Quantity 690 110 420 a) A "market bundle" for a typical family is deemed to be 5 burgers, 3 patties, and 4 pizzas. Compute the consumer price index (CPI) for each of the three years, using 1990 as the base year. b) What was the rate of inflation from 1990 to 2000, using the CPI you calculated in (a)? c) Compute the CPI for each of the three years, using 2000 as the base year instead of 1990 but using the same "market bundle." d) What was the rate of inflation from 2000 to 2010, using the CPI you calculated in (c)? Is it the same as your answer to (b)? e) Now suppose that a new market bundle is defined; the "market bundle" is now 6 burgers, 2 patties, and 4 pizzas. Compute the CPI for the three years, using this "market bundle" and using 1990 as the base year. f) What was the new rate of inflation from 2000 to 2010, using the CPI you calculated in (e)? Explain why it is different from your answer to (b)?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 3
In Crabby land, there are only 3 goods: Burgers, Patties, and Pizza. The following table shows the prices
and quantities produced of these goods in 1990, 2000, and 2010:
Burgers
Patties
Pizza
Price
2.00
7.00
0.70
1990
Quantity
500
300
300
Price
1.00
10.00
4.00
2000
Quantity
600
200
200
Price
1.10
10.50
0.75
2010
Quantity
690
110
420
a) A "market bundle" for a typical family is deemed to be 5 burgers, 3 patties, and 4 pizzas. Compute
the consumer price index (CPI) for each of the three years, using 1990 as the base year.
b) What was the rate of inflation from 1990 to 2000, using the CPI you calculated in (a)?
c) Compute the CPI for each of the three years, using 2000 as the base year instead of 1990 but using
the same "market bundle."
d) What was the rate of inflation from 2000 to 2010, using the CPI you calculated in (c)? Is it the
same as your answer to (b)?
e) Now suppose that a new market bundle is defined; the "market bundle" is now 6 burgers, 2
patties, and 4 pizzas. Compute the CPI for the three years, using this "market bundle" and using
1990 as the base year.
f) What was the new rate of inflation from 2000 to 2010, using the CPI you calculated in (e)? Explain
why it is different from your answer to (b)?
Expert Solution
Step 1: Define consumer price index
The consumer's changes in price may vary sometimes, This is measured through the consumer price index as it is used to calculate inflation in a country. The changes in CPI are affected by the income of consumers.
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