Dave knits ski caps with tassels at a negligible cost.He sells 4 percent more caps this year than last year.The market price this year is 1 percent lower than last year.Which inflation rate makes Dave as well off this year as last year?

Question

Quizplus · Accepted Answer

To calculate Dave's income this year, we need to first calculate his income last year.

Let's assume that last year, Dave sold x caps at a price of p dollars each.

His income last year was then x * p.

This year, he sells 4 percent more caps, or 1.04x caps.

The price this year is 1 percent lower, so the price per cap is 0.99p dollars.

His income this year is then (1.04x) * (0.99p) = 1.0296xp.

To find the inflation rate that makes him equally well off, we set his income this year equal to his income last year:

1.0296xp = x * p

1.0296 = 1 + i

where i is the inflation rate.

Solving for i, we get:

i = 1.0296/1 - 1 = 0.0296 = 2.96%

Therefore, the inflation rate that makes Dave equally well off this year as last year is 2.96 percent, which is closest to answer choice C (3 percent).

Dave Knits Ski Caps with Tassels at a Negligible Cost