Suppose that people consume only three goods golf balls club

Suppose that people consume only three goods: golf balls, clubs and Gatorade.

2016 : Price of golf balls : $2 Quantity: 100, Price Clubs: $200, Quantity:10, Gatorade Price:$1, Quantity 200.

2017 : Price of golf balls : $3 Quantity: 150, Price Clubs: $250, Quantity:20, Gatorade Price:$2, Quantity 250.

Use fixed basket of goods : 100 balls, 10 clubs, 100 Gatorades. Base year is 2016.

Calculate percentage change of each of the three goods. What is the percentage change in the overall price level (inflation rate).

Do golf clubs become more or less expensive relative to Gatorade?

Does the well being of some people change relative to the well-being of others?

Explain in detail and show all calculations in detail.

Solution

Golf balls

Clubs

Gatorade

Overall price level

2016 Price

2

200

1

2016 Quantity

100

10

200

2400

2017 Price

3

250

2

2017 Quantity

150

20

250

2017 Price

2

125

1.6

2017 Quantity

100

10

200

1770

% Change in Price

0

-37.5

60

-26.25

% Change in Price of golf ball = ((2-2)/2)*100 = 0

% Change in Price of golf clubs = ((125-200)/200)*100 = -37.5 percent

% Change in Price of gatorade = ((1.6-1)/1)*100 = 60 percent

Price level of 2016 = 2*100+200*10+1*200 = 2400

Price level of 2017 = 2*100+125*10+1.6*200 = 1770

Overal price level = ((1770-2400)/2400)*100 = -26.25 percent

Golf clubs are less expensive relative to Gatorade as the price of clubs decreased by 37 percent whereas the price of Gatorade increased by 60 percent.
True as the people who buy Gatorade are worse off than people who buy golf balls and golf clubs