In Homerland, Homer Simpson is the typical consumer.His annual consumption bundle is:

Item Quantity 1977 Price 1987 Price 1997 Price

Beer 2000 $ .75 $ 1.50 $ 2.50

Donuts 1500 $ .20 $.30 $.40

TV 1 $ 150.00 $ 200.00 $ 250.00

a.What are the Price Indices for 1977 and 1997 if 1987 is the base year?

b.What is inflation between 1977 and 1987?Between 1977 and 1997?

c.Homer's nominal hourly wages at the nuclear power plant have been rising from $5 in 1977 to $6 in 1987 and then to $7 dollars in 1997.Homer thinks he is getting a good deal. Is he?

Suppose that the market basket of goods costs $4,500 today and coast $3,800 in 1988. Compute the CPI for 2005 with a 1988 based. Write down the formula that you use and use a sentence to explain what your answer means.

Suppose that the CPI (with a 1992 base) was 115 in 1997. Show the formula and compute the inflation rate between 1997 and 1992.