Health care cost are reportedly rising at an annual rate tha

Health care cost are reportedly rising at an annual rate that is triple the general inflation rate. The current inflation rate is running at 4% per year. In 10 years, how much greater will health care costs be compared to a service commodity that increases at exactly 4% general inflation rate A recent college graduate has received the annual salaries shown in the following table over the past four years. During this time, the CPI has performed as indicated. Determine the annual salaries in year-zero dollars, using CPI as the indicator of general price inflation. A large corporation\'s electricity bill amount to $400 million. During the next 10 years electricity usage is expected to increase by 75%, and the estimated electricity bill 10 years hence has been projected to be $920 million. Assuming electricity usage and rates increase at uniform annual rate over the next 10 years, what is the annual rate of inflation of electricity prices expected by the corporation?

Solution

1. Healthcare: r=12%

In 10 years: P=(1+.12)^10 = 3.1058

Commodity: r=4%
In 10 years: P=(1+.04)^10 = 1.4802

In 10 years: healthcare/commodity = 2.0982 i.e. healthcare costs will be 2.0982 times the cost of a commodity whose price is increasing at the rate of inflation

2.

The formula used for year 2: 36200/[(1+.024)*(1+.019)] and so on
The CPI is an annual measure, therefore CPI rates would cumulatively multiply for each year.

3. Usage: 1.75=1*(1+u)^10 where u represents the constatn increse in the usage

u=1.0576-1 =.0576 =5.76%

Inflation: (920/1.75)=400(1+i)^10 where i is the rate of inflation and 920/1.75 is the cost of the same units of electricity
i=1.0277-1 = .0277 =2.77%

end of the year sale	salary (AS)	CPI	year 0
1	$34,000	2.4%	$33,203
2	$36,200	1.9%	$34,692
3	$38,800	3.3%	$35,996
4	$441,500	3.4%	$209,085