Question

In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base year, which of the following statements is correct?
a. For the typical consumer, the number of dollars spent on razors is equal to the number of dollars spent on
cologne in each of the two years.
b. The consumer price index is 310 in 2010.
c. The rate of inflation is 29.17% in 2010.
d. None of the above is correct.

Answer 1

Answer:

C) The rate of inflation is 29.17% in 2010.

Explanation:

the price of the basket in 2009 (base year) = ($20 x 6) + ($30 x 4) = $120 + $120 = $240

the price for the basket in 2010 = ($25 x 6) + ($40 x 4) = $150 + $160 = $310

inflation rate = [(CPI 2010 - CPI 2009) / CPI 2009] x 100 = [($310 - $240) / $240] x 100 = 29.17%