The consumer price index

QUESTION-1:                                                                                                                                    (16%)

The consumer price index, or CPI, measures the cost of living for a typical urban household by multiplying the price for each category of expenditure (housing, food, and so on) times a measure of the importance of that expenditure in the average consumer’s market basket and summing over all categories. However, using data from the consumer price index, we can see that changes in the cost of living for different types of consumers can vary a great deal.

Let’s compare the cost of living for a hypothetical retired person and a hypothetical college student. Let’s assume that the market basket of a retired person is allocated in the following way: 10% on housing, 15% on food, 5% on transportation, 60% on medical care, 0% on education, and 10% on recreation. The college student’s market basket is allocated as follows: 5% on housing, 15% on food, 20% on transportation, 0% on medical care, 40% on education, and 20% on recreation.

The accompanying table shows the November 2007 CPI for each of the relevant categories.

(A) Calculate the overall CPI for the retired person and for the college student by multiplying the CPI for each of the categories by the relative importance of that category to the individual and then summing each of the categories.                                                                                                      (10%)

The CPI for all items in November 2007 was 210.2.

(B) How do your calculations for a CPI for the retired person and the college student compare to the overall CPI?                                                                                                                            (6%)

QUESTION-2:                                                                                                                                    (16%)

Assume that the below given data is from an URBAN city in the U.S., and a typical consumer utilizes only six types of goods and services: Housing, food, transportation, medical care, education and recreation.  The hypothetical unit prices of the six goods and services are given in the accompanying table.  Assume that the typical consumer purchases 1 units of housing, 6 units of food, 2 units of transportation, 1 units of medical care, 2 units of education and 2 units of recreation.  Answer the following questions:

(A)  What is the percent change in the price of HOUSING from 2000 to 2009?                              (2%)

(B)  What is the percent change in the price of FOOD from 2000 to 2009?                         (2%)

(C)  What is the percent change in the price of TRANSPORTATION from 2000 to 2009? (2%)

(D)  What is the percent change in the price of MEDICAL CARE from 2000 to 2009?                    (2%)

(E)  What is the percent change in the price of EDUCATION from 2000 to 2009?              (2%)

(F)  What is the percent change in the price of RECREATION from 2000 to 2009?                        (2%)

(G) Using 2000 as a base year, create a price index for ALL SIX commodities for ALL years        (4%)

(H)  What is the percent change in the price index from 2000 to 2009?                                           (4%)

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