An economy has only two goods, whose prices and typical consumption quantities are as follows:

a. Using December 2010 as the base period for calculations and also as the year for measuring the typical consumer€™s market basket, calculate the CPI in December 2010 and December 2011.
b. What is the annual inflation rate for 2011?
c. Do you think your answer in (b) would understate the actual inflation rate in 2011? Briefly, why or why not?

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Dec. 2010 Dec. 2011 Quantity 150 25 Price Quantity Price Fruit (Ibs) Nuts (lbs) $1.00 100 $1.00 $3.00 $4.00 50