Question

The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. Refer to Scenario 24-1. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost: a) $0.27, so tennis balls were cheaper in 1975.b) $3.66, so tennis balls were cheaper in 1975.c) $3.66, so tennis balls were cheaper in 2005.d) $0.27, so tennis balls were cheaper in 2005.

Answer 1

Answer:

a) $0.27, so tennis balls were cheaper in 1975.

Explanation:

formula for real price is

Real Price in year t = Nominal Price in year t × Adjustment factor

Adjustment factor is measured using the CPI values.

Real Price in year t = Nominal Price in year t × CPI in base year

                                                                             CPI in year t

 Real Price in year 2005 = Nominal Price in year 2005 × CPI in 1975

                                                                                              CPI in 2005

                     = 1 × 52.3

                             191.3

                  = 0.27 = $0.27

The real price of tennis balls in 1975 was $0.10

Therefore, tennis balls were cheaper in 1975.

option a is correct

Answer 2

Answer:

a) $0.27, so tennis balls were cheaper in 1975.

Explanation:

This is a question that has to do with the time value of money & includes accounting for inflation.

Let's list out the given parameters us:

Nominal price (1975) = $0.10, CPI (1975) = 52.3, Nominal price (2005) = $1.00, CPI (2005) = 191.3

We want to know how much the tennis ball cost in 1975 dollars, hence, we make 1975 our base year. The calculation follows below:

Real price (2005) = Nominal price (2005) * CPI (1975) ÷ CPI (2005)

Real price (2005) = 1.00 * 52.3 ÷ 191.3

Real price (2005) = $0.2734

Real price (2005) = $0.27

The calculation reveals to us that a 2005 tennis ball cost $0.27 (in 1975 dollars). Which means that a tennis ball in 2005 is more costly than it did in 1975.

Hence, option A is the correct answer