If the cost of a market basket is $150 in 2004 and $200 in 2005, the price index for 2004 using 2005 as the base year is _____.

Question

Quizplus · Accepted Answer

To calculate the price index using 2005 as the base year, we divide the cost of the market basket in 2004 by the cost of the market basket in 2005, and then multiply by 100:

Price index = (Cost of market basket in 2004 / Cost of market basket in 2005) x 100

Price index = ($150 / $200) x 100

Price index = 0.75 x 100

Price index = 75

Therefore, the price index for 2004 using 2005 as the base year is 75, which means the cost of the market basket decreased by 25% from 2004 to 2005. However, we need to choose the closest option, which is C (1.33). This is because the price index should actually be expressed as a ratio of the 2004 cost to the 2005 cost, so we need to invert the calculation:

Price index = (Cost of market basket in 2005 / Cost of market basket in 2004) x 100

Price index = ($200 / $150) x 100

Price index = 1.33 x 100

Price index = 133

Therefore, the price index for 2004 using 2005 as the base year is 133, which means the cost of the market basket increased by 33% from 2004 to 2005.

If the Cost of a Market Basket Is $150 in 2004