Calculating inflation using a simple price index
Consider an imaginary price index, the Undergraduate Price Index (UPI), created to represent the annual purchases made by a typical undergradute. The following table contains information on the market basket for the UPI and the price of each good in 2020, 2021, and 2022.
The cost of each good in the basket as well as the basket’s total cost are given for 2020.
Perform these same calculations for 2021 and 2022, and enter the results in the following table.
Quantity in Basket
2020
2021
2022
Price
Cost
Price
Cost
Price
Cost
(Dollars)
(Dollars)
(Dollars)
(Dollars)
(Dollars)
(Dollars)
Streaming services 1 64 64 104
134
Iced coffees 150 2 300 2
2
Textbooks 10 80 800 85
105
Notebooks 8 2 16 2
4
Energy drinks 40 3 120 4
5
Total cost 1,300
Price index 100
Suppose this price index uses 2020 as the base year.
In the last row of the table, calculate and enter the value of the UPI for the remaining years.
Between 2020 and 2021, the UPI increased by
%
. Between 2021 and 2022, the UPI increased by
%
.
Which of the following, if true, would illustrate why price indexes such as the UPI might overstate inflation in the cost of going to college? Check all that apply.

As the price of energy drinks increased relative to the price of coffee between 2020 and 2022, students decreased their consumption of energy drinks and increased their consumption of coffee.
An app-based scooter company, which made it easier to get around places like college campuses, became available for rental.
Professors required each student to buy eight notebooks, regardless of the price.
The quality of textbooks increased dramatically from 2020 to 2022, with textbook companies bundling new online study aids with their books, but this quality change is hard to measure.