Question

The table below lists the prices and quantities consumed of three different goods from 2017-2019. 2017 2018 2019 Good Price ($) Quantity Price ($) Quantity Price ($) Quantity 12 22 18 3 30 5 Oll 25 10 5 a. For 2017, 2018, and 2019, determine the amount that a typical consumer pays each year to purchase the quantities listed in the table above. Instructions: Round your answers to the nearest whole number. 2017 220 2018 228 2019 238 $ $ $ Consumer expenditure Instructions: Round your answers to two decimal places. b. The percentage change in the amount the consumer paid is 3.64 % from 2017 to 2018, and 4.39 % from 2018 to 2019. c. It is problematic to use your answers to part b as a measure of inflation because only price is changing Instructions: Round your answers to two decimal places d. Suppose we take 2017 as the base year, implying that the market basket is fixed at 2017 consumption levels. Using 2017 consumption levels, the rate of inflation was 3.64 % from 2017 to 2018, and 0.72 % from 2018 to 2019. Instructions: Round your answers to two decimal places. e. Repeat the exercise from part d, now assuming that the base year is 2018. Using 2018 consumption levels, the rate of inflation is 3.64 % from 2017 to 2018, and 4.39 % from 2018 to 2019. f. Your answers from parts d and e were different because the base years put different weights on the goods o

Answer 1

a)

Consumption in 2017=12*10+5*18+1*10=$220

Consumption in 2018=16*8+3*30+2*5=$228

Consumption in 2019=22*4+4*25+5*10=$238

b)

Percentage change in amount the customer paid from 2017 to 2018=(228-220)/220=3.64%

Percentage change in amount the customer paid from 2018 to 2019=(238-228)/228=4.39%

c)

It is problematic to calculate inflation as there is a change in quantities consumed (along with change in price)

d)

If we assume 2017 as base year

Consumption in 2017=12*10+5*18+1*10=$220

Consumption in 2018=16*10+3*18+2*10=$234

Consumption in 2019=22*10+4*18+5*10=$342

Rate of inflation from 2017 to 2018=(234-220)/220=6.36%

Rate of inflation from 2018 to 2019=(342-234)/234=46.15%

e)

If we assume 2018 as base year

Consumption in 2017=12*8+5*30+1*5=$251

Consumption in 2018=16*8+3*30+2*5=$228

Consumption in 2019=22*8+4*30+5*5=$321

Rate of inflation from 2017 to 2018=(228-251)/251=-9.16%

Rate of inflation from 2018 to 2019=(321-228)/228=40.79%

f)

Difference is due to different base baskets i.e. the base year put different weights on goods.