Answer to Question #84489 in Macroeconomics for Pal

Question

Suppose the residents of Vegopia spend all their income on cauliflower (CF), broccoli
(B)and carrots (C). In 2010, the base year, they buy 100 heads of cauliflower for $200,
60 bunches of broccoli for $90, and 500 carrots for $50. In 2011 they buy 75 heads of
cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100.
(a) Calculate the CPI for (i) 2010 and (ii) 2011.
(b) Calculate the inflation rate.
(a) The CPI in the base year 2010 is 100.
The CPI in 2011 is as follows:
CPI(2011) = Cost of basket at current prices (2011) x 100
Cost of basket at base year prices (2010)
The basket is the base year quantities (ie. CF = 100, B = 60 and C = 500)