The people who live on Second Life Island consume only juice

The people who live on Second Life Island consume only juice and cloth. Last year, which was the CPI base year, the price of juice was $3 a bottle, the price of cloth was $6 a length, and the average urban household spent $21 on juice and $36 on cloth. (You can use this information to calculate the quantity of juice and cloth in the basket.)This year, the price of juice is $10 a bottle and the price of cloth is $4 a length.

The CPI in the current year is ?????

Solution

The consumtion of juice in base year was = $21/$3 = 7 bottles

The consumtion of cloth in base year was = $36/$6 = 6 lengths

Total spending in base year = $21 + $36 = $57

The cost of the same basket in the current year = 7 * $10 + $4 * 6 = $70 + $24 = $94.

% increase in the price of the consumption bundle from base year to current year = ($94 - $57)/$57 * 100 = $37/$57 * 100 = 0.65*100 = 65%

CPI in base year is 100 and CPI would inccrease by 65% in current year. So, CPI in current year = 100 + 65% of 100 = 100 + 65 = 165.