   Chapter 6, Problem 9WNG

Chapter
Section
Textbook Problem

Assume that the market basket contains 10X, 20Y, and 45Z. The current-year prices for goods X, Y, and Z are $1,$4, and $6, respectively. The base-year prices are$1, $3, and$5, respectively. What is the CPI in the current year?

To determine

The CPI in the current year.

Explanation

Given that the market basket contains quantity of good X (QX) is 10, quantity of good Y (QY) is 20 and quantity of good Z (QZ) is 45. The current year price of X (PX) is $1, the current year price of Y (PY) is$4 and the current year price of Z (PZ) is $6. The base year price of X is$1, the base year price of Y is $3 and the base year price of Z is$5.

The total dollar expenditure can be calculated as the weighted average of price and quantity of the three goods. The total dollar expenditure in the current year can be calculated by substituting the respective values in Equation (1) as follows:

Total dollar expenditureCurrent year=((PXCurrent year×QXCurrent year)+(PYCurrent year×QYCurrent year)+(PZCurrent year×QZCurrent year)) (1)

Total dollar expenditureCurrent year=(1×10)+(4×20)+(6×45)=10+80+270=360

Thus, the total dollar expenditure in the current year is \$360

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