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Scenario: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2 per gallon, 2 CDs for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50.
-(Scenario: Price Index) Look at the scenario Price Index. The price index for the second month is:
A)94.
B)106.4.
C)100.
D)101.1.

Question

Quizplus · Accepted Answer

To calculate the price index, first find the cost of the basket in the base period and the second month. Base period cost: (20*$2) + (2*$13) + (4*$7) = $40 + $26 + $28 = $94. Second month cost: (20*$2.25) + (2*$12.50) + (4*$7.50) = $45 + $25 + $30 = $100. Price index = (Second month cost / Base period cost) * 100 = ($100 / $94) * 100 = 106.4.

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