Question

it the question prompts you to \calculate,\ you must show how you arrived at your final answer.

		prices
mocha coffee	100 cups	$2.00 per cup	$2.50 per cup
sweet pudding	50 quarts	$1.50 per quart	$2.20 per quart
cassava leaf salad	25 packages	$1.00 per package	$1.20 per package

the nation of kona cultivates coffee beans and cassava, from which all their consumer goods are produced.

(a) calculate the cost of the market basket of goods in the table in 2010 and in 2015. show your work.

(b) use 2010 as the base year to calculate the price indices for 2010 and 2015 for the market basket of goods in the table. show your work.

(c) in order for a citizen of kona to maintain the same standard of living between 2010 and 2015, what percentage change in nominal income would be needed? explain.

Explanation:

Part (a)

Step1: Calculate 2010 cost

For each product, multiply quantity by 2010 price and sum.
Mocha: \(100 \times 2.00 = 200\)
Sweet pudding: \(50 \times 1.50 = 75\)
Cassava leaf salad: \(25 \times 1.00 = 25\)
Total 2010: \(200 + 75 + 25 = 300\)

Step2: Calculate 2015 cost

Multiply quantity by 2015 price and sum.
Mocha: \(100 \times 2.50 = 250\)
Sweet pudding: \(50 \times 2.20 = 110\)
Cassava leaf salad: \(25 \times 1.20 = 30\)
Total 2015: \(250 + 110 + 30 = 390\)

Step1: Price index formula

Price index = \(\frac{\text{Cost of basket in year}}{\text{Cost of basket in base year}} \times 100\) (Base year: 2010)

Step2: 2010 price index

Base year index: \(\frac{300}{300} \times 100 = 100\)

Step3: 2015 price index

\(\frac{390}{300} \times 100 = 130\)

Percentage change in nominal income should equal inflation (from CPI).
Inflation = \(\frac{\text{2015 index} - \text{2010 index}}{\text{2010 index}} \times 100 = \frac{130 - 100}{100} \times 100 = 30\%\)
To maintain standard of living, nominal income must rise by 30% (to offset price increases).

Answer:

2010 cost: \$300
2015 cost: \$390

Part (b)