CALIFORNIA STATE UNIVERSITY – SACRAMENTO Handout
ECON 100A: Intermediate Macroeconomic Theory Constructing Price Indices
Prof. Van Gaasbeck
The National Film Association developed the Movie Price Index (MPI) in 1998 based upon the annual purchases of a
typical moviegoer. Information on the market basket for the MPI and the prices for each of the goods in 1998, which is
the base year, and in 2001 and 2002 is shown in the table below.
Good Quantity 1998 2001 2002
Movie tickets 10 $5 $7 $8
Tubs of popcorn 7 $6 $5 $4
Boxes of candy 5 $2 $3 $4
Sodas 11 $2 $3 $3
Calculate the cost of the market basket in each year.
Year Cost of Market
Basket Cost of Basket in Year t/
Cost of basket in base year Movie Price Index
(1998 = 100)
1998
___________
___________
___________
2001 ___________
___________ ___________
2002 ___________
___________ ___________
Construct the price index (Movie Price Index, MPI), using 1998 as the base year.
Compute the inflation rate for moviegoers in 2002.
For each of the following situations, describe which type of bias/problem referred to and why each would lead to an
overstatement or understatement of the inflation rate:
(i) The movie theater where the data were collected was remodeled at the end of 2001 and a new surround sound
system was added.
(ii) In the years since 1998, while candy prices increased popcorn prices dropped. As a result, moviegoers bought
more and more popcorn while buying fewer boxes of candy.
(iii) The concession stand started selling cappuccino in 2000. Cappuccino first sold for $3, but currently sells for $1 a
cup and is a big hit with moviegoers.
(iv) New adjustable seats with cup holders were installed.