7. The Consumer Price Index The Consumer Price Index represents the average price of goods that households consume. Many thousands of goods are included in such an index. Here consumers are represented as buying only food (pizza) and gas as their basket of goods. Here is a representation of the kind of data the Bureau of Economic Analysis collects to construct a consumer price index. In the base year, 2012, both the prices of goods purchased and the quantity of goods purchased are collected. In subsequent years, only prices are collected. Each year, the agency collects the price of that good and constructs an index of prices that represents two exactly equivalent concepts: How much more money does it take to buy the same basket of goods in the current year than in the base year? How much has the purchasing power of money declined, measured in baskets of goods, in the current year, from the base year? The data: In an average week in 2012, the Bureau of Economic Analysis surveys many consumers and determines that the average consumer purchases 2 pizzas and 6 gallons of gas in a week. The prices per pizza and per gallon in subsequent years are shown below. a. What is the cost of the consumer price basket in 2012? b. What is the cost of the consumer price basket in 2013 and in subsequent years? c. Represent the annual cost of the consumer price basket as an index number. Set the value of the index number equal to 100 in 2012. d. Calculate the annual rate of ination using the percent change in the value of the index number between each year from 2013 on. Year Price of Pizzas Price of Gas 2012 $10 $3 2013 $11 $3.30 2014 $11.55 $3.47 2015 $11.55 $3.50 2016 $11.55 $2.50 2017 $11.55 $3.47 Consumer Price Index 2017 = Year 100 Inflation rate 2012 2013 2014 2015 2016 2017 100 Why are the inflation rates (slightly) different in part d and part