# ec1ps4 - Department of Economics University of California...

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1 Department of Economics Prof. Kenneth Train University of California, Berkeley Spring Semester 2006 Economics 1 Problem Set 4 Due in the second section meeting in the week of April 10. I. Measurement of Price Changes. In Merryland, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices and quantities produced of these goods in 1980, 1990, and 1991: 1980 1990 1991 P Q P Q P Q Popcorn 1.00 500 1.00 600 1.05 590 Movie Shows 5.00 300 10.00 200 10.50 210 Diet Drinks 0.70 300 0.80 400 0.75 420 a) A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie shows, and 3 diet drinks. Compute the consumer price index (CPI) for each of the three years, using 1980 as the base year. b) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (a)? c) Now compute the CPI for each of the three years, using 1990 as the base year instead of 1980 but using the same "market bundle." d) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (c)? Is it the same as your answer to (b)?

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