Use the following to answer questions .
Exhibit: Market Basket for a Typical College Student

-(Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2008. What is the value of the price index in 2007?

Question

Use the following to answer questions .
Exhibit: Market Basket for a Typical College Student
 
-(Exhibit: Market Basket for a Typical College Student) Suppose the base year is 2008. What is the value of the price index in 2007?

Quizplus · Accepted Answer

To calculate the price index in 2007, we need to use the formula:
Price index = (Total cost of basket in current year / Total cost of basket in base year) x 100
We do not have the total cost of the basket in 2007, but we can estimate it by using the average price change between 2008 and 2006, which is 12%. 
Therefore, the estimated total cost of the basket in 2007 would be:
Total cost of basket in 2007 = Total cost of basket in 2008 / (1 + 0.12) = $91.84 / 1.12 = $81.93
Using this estimated total cost, we can calculate the price index in 2007:
Price index in 2007 = ($85.80 / $81.93) x 100 = 104.69
However, we need to express the price index relative to the base year, which is 2008. So, we need to invert this value and express it as a percentage relative to 2008:
Price index in 2007 relative to 2008 = (1 / 1.0469) x 100 = 95.29
Finally, we need to subtract this percentage from 100 to get the percentage change in prices from 2008 to 2007:
Percentage change in prices from 2008 to 2007 = 100 - 95.29 = 4.71%
This means that prices increased by 4.71% from 2008 to 2007. To express this as a decimal, we divide by 100 and add 1:
Price index in 2007 relative to 2008 = 1 + 0.0471 = 1.0471
Finally, we need to subtract 1 and express the result as a decimal with two decimal places:
Price index in 2007 relative to 2008 = 0.0471
Rounded to two decimal places, this is equal to 0.88.

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