Assignment No 1 (Week 2) Measuring the Cost of Living Question 1 If the price of building a bridge rises, is the CPI or the

GDP deflator affected more? Why? Question 2 Suppose people consume only 3 goods, as shown in this table: Tennis Balls Tennis Racquets PowerAde 2009 Price $2 $40 $1 2009 Quantity 100 10 200 2010 Price $2 $60 $2 2010 Quantity 100 10 200 a) What is the percentage change in the price of each of the three goods? What is the percentage change in the overall price level? b) Using a method similar to the CPI, compute the percentage change in the overall price level. c) If you were to learn that a bottle of PowerAde increased in size from 2009 to 2010, should that information affect your calculation of the inflation rate? If so, how? d) If you were to learn that PowerAde introduced new flavours in 2010, should that information affect your calculation of the inflation rate? If so, how? Question 3 Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain. a) b) c) d) e) The invention of the iPod The introduction of air-bags in cars Increased personal computer purchases in response to a decline in their price More scoops of sultanas (raisins) in each package of Sultana (Raisins) Bran Greater use of fuel efficient cars after petrol prices increase