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
