Assume that households consume only hot dogs and soda; the average household consumes 12 hotdogs and 20 bottles of soda. In 1995, a hot dog was $0.90 each and soda $0.50 each. In 2003, hotdog price went up to $1.25, and soda price went up to $1.00. If 2003 is the base year, then the price index in 1995 would be:

The price index in 1995 would be $59.4

Explanation:

In order to calculate the price index in 1995 we would have to calculate the following formula:

price index in 1995=(Market basket at current year prices/ Market basket at base year prices)*100

Market basket at current year prices=12 hotdogs*price each hotdog+20 bottles of soda*price each bottes of soda

Market basket at current year prices=12 hotdogs*0.9+20 bottles of soda*0.5

Market basket at current year prices=$20.8

Market basket at base year prices =12*1.25+20*1

Market basket at base year prices=$35

Therefore, price index in 1995=($20.8/$35)*100

price index in 1995=$59.4

The price index in 1995 would be $59.4

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