Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2006 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2007, they buy 75 heads of cauliflower for $225,80 bunches of broccoli for $120, and 500 carrots for $100.

b) Using 2006 as the base year calculate the CPI for each year.

c) What is the inflation rate in 2007? My answers: b) CPI of 2006 = [ ($325/$325) x 100] = 100 CPI of 2007 = [ ($425/$325) x 100] = 137 c) Inflation rate in 2007 = [ (137-100) / 100 x 100] = 37%

Inflation rate in 2007 is 37%.

Market prices for 2006.

100 heads of cauliflower = $200 = > 1 head of cauliflower = $200 / 100 = $2.

50 bunches of broccoli = $75 = > 1 bunch of broccoli = $75 / 50 = $1.50

500 carrots = $50 = > 1 carrot = $50 / 500 = $0.10

Total cost of items of food = $2 + $1.50 + $0.10 = $3.60

Market prices for 2007.

75 heads of cauliflower = $225 = > 1 head of cauliflower = $225 / 75 = $3.

80 bunches of broccoli = $120 = > 1 bunch of broccoli = $120 / 80 = $1.50

500 carrots = $100 = > 1 carrot = $100 / 500 = $0.20

Total cost of items of food = $3 + $1.50 + $0.20 = $4.70

CPI of 2006 = $3.60 / $3.60 x 100 = 100

CPI of 2007 = $4.70 / $3.60 x 100 = 130.56

Inflation rate in 2007 = (130.56 - 100) / 100 x 100 = 30.56%