Chapter 7, Problem 8SQ

To determine

Consumer price index.

Answer to Problem 8SQ

Option ‘b’ is correct.

Explanation of Solution

Option (b):

Consumer price index is calculated as follows:

$\begin{array}{l}\text{Consumer Price Index}=\frac{{\text{Cost of basket}}_{\text{t}}}{{\text{Cost of basket}}_{\text{b}}}\\ 123=\frac{\left(4\times 3\right)+\left(2\times 10\right)}{\left(4\times 2\right)+\left(2\times 9\right)}\times 100\\ 123=\frac{32}{26}\times 100\\ 123\approx 123.07\end{array}$

The calculated value of consumer price index is approximately equal to the given value of 123. Thus, option 'b' is correct.

Option (a):

$\begin{array}{l}\text{Consumer Price Index}=\frac{{\text{Cost of basket}}_{\text{t}}}{{\text{Cost of basket}}_{\text{b}}}\\ 100=\frac{\left(4\times 3\right)+\left(2\times 10\right)}{\left(4\times 2\right)+\left(2\times 9\right)}\times 100\\ 100=\frac{32}{26}\times 100\\ 100<123.07\end{array}$

The calculated value of consumer price index is greater than the given value of 100. Thus, option 'a' is incorrect.

Option (c):

$\begin{array}{l}\text{Consumer Price Index}=\frac{{\text{Cost of basket}}_{\text{t}}}{{\text{Cost of basket}}_{\text{b}}}\\ 126=\frac{\left(4\times 3\right)+\left(2\times 10\right)}{\left(4\times 2\right)+\left(2\times 9\right)}\times 100\\ 126=\frac{32}{26}\times 100\\ 126>123.07\end{array}$

Here, the calculated value of consumer price index is less than the given value of 126. Thus, option ‘c’ is incorrect.

Option (d):

$\begin{array}{l}\text{Consumer Price Index}=\frac{{\text{Cost of basket}}_{\text{t}}}{{\text{Cost of basket}}_{\text{b}}}\\ 130=\frac{\left(4\times 3\right)+\left(2\times 10\right)}{\left(4\times 2\right)+\left(2\times 9\right)}\times 100\\ 130=\frac{32}{26}\times 100\\ 130>123.07\end{array}$

The calculated value of consumer price index is less than the given value of 130. Thus, option ‘d’ is incorrect.

Economics Concept Introduction

Consumer price index: Consumer Price Index refers to the changes in the price level of consumer goods and services purchased by households.