Chapter 15, Problem 7MCQ

To determine

The question requires us to determine the value of the price index in the pre-frost and post-frost periods.

Explanation of Solution

The formula for the price index is:

  $\text{Price}\text{index=}\frac{\text{Price}\text{of}\text{good}\text{in}\text{current}\text{year}}{\text{Price}\text{of}\text{good}\text{in}\text{base}\text{year}}\text{×100}$

Given,

Cost or price of the basket in the pre-frost period = $95

Cost of the basket in the post-frost period (year 2 is the base year) = $175

  $\begin{array}{c}\text{Price}\text{index in pre-frost =}\frac{\text{Price}\text{of}\text{good}\text{in}\text{current}\text{year}}{\text{Price}\text{of}\text{good}\text{in}\text{base}\text{year}}\text{×100}\\ =\frac{\$95}{\$175}\times 100\\ =54.28\\ \text{Price}\text{index in post-frost =}\frac{\text{Price}\text{of}\text{good}\text{in}\text{current}\text{year}}{\text{Price}\text{of}\text{good}\text{in}\text{base}\text{year}}\text{×100}\\ =\frac{\$175}{\$175}\times 100\\ =100\end{array}$

The price index in the pre-frost period is 54 and in the post-frost period is 100.

Thus, option “a” is correct.