Question

Sara consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Sara buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Sara buys 10 green apples.

 

• Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2?

 

• Compute Sara’s nominal spending on apples in each year. How does it change from year 1 to year 2?

Answer 1

Consumer Price Index = [Cost of Basket(t) ÷ Cost of Basket(0)] x 100

Cost of Basket(t) $\$1\times10=\$10$

Cost of Basket(o)$\$1\times10=\$10$

CPI; $\frac{10}{10}\times100= 100$

There is no index change in both years.

Year 1 Nominal spending:

$$\$1\times10 = \$10.$$

Year 2 Nominal spending:

$$\$1\times10 = \$10.$$