   Chapter 6, Problem 3PA

Chapter
Section
Textbook Problem

Suppose that people consume only three goods, as shown in this table: a. What is the percentage change in the price of each of the three goods?b. Using a method similar to the CPI, compute the percentage change in the overall price level.c. If you were to learn that a bottle of Gatorade increased in size from 2017 to 2018, should that information affect your calculation of the inflation rate? If so, how?d. If you were to learn that Gatorade introduced new flavors in 2018, should that information affect your calculation of the inflation rate? If so, how?

Subpart (a):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Explanation

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

Subpart (b):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (c):

To determine

Measuring percentage change in price, CPI and Inflation rate.

Subpart (d):

To determine

Measuring percentage change in price, CPI and Inflation rate.

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