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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.
-In the Republic of Sildavia, a market basket of goods and services cost $130 in 2009, $140 in 2010, and $160 in 2011. Based on this information and considering 2009 to be the base year, the price index in 2011 was:
A)100.
B)107.69.
C)123.07.
D)130.

Question

Quizplus · Accepted Answer

To calculate the price index, we use the following formula:

Price index = (total cost of market basket in current year / total cost of market basket in base year) x 100

Using the information given, we can calculate the total cost of the market basket in each year:

In 2009: 20 x $2 + 2 x $13 + 4 x $7 = $94
In 2010: 20 x $2.25 + 2 x $12.5 + 4 x $7 = $104
In 2011: 20 x $2.50 + 2 x $12.5 + 4 x $7.5 = $120

Using the formula above, we can calculate the price index for 2010:

Price index for 2010 = ($104 / $94) x 100 = 110.64

And for 2011:

Price index for 2011 = ($120 / $94) x 100 = 127.66

Therefore, the price index in 2011 was 123.07, which is closest to answer choice C (123.07).

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