High School

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Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25. If the price index was 38.8 in 1970 and was 180 in 2006, what is the price of a 1970 bag of groceries in 2006 prices?

A. $25.00
B. $29.11
C. $37.11
D. $43.22

Answer :

Final answer:

The price of a 1970 bag of groceries in 2006 prices, after adjusting for inflation using the given price indices, is $37.11. Option c. $37.11 is the correct answer.

Explanation:

To find the price of a 1970 bag of groceries in 2006 prices, we first need to understand the concept of real vs. nominal prices. Nominal prices are the actual prices paid at the time of purchase, whereas real prices are adjusted for inflation and reflect the purchasing power of money over time. Using the given price indices for 1970 (38.8) and 2006 (180), we can calculate the price of Ethel's groceries in 2006 dollars.

The formula to convert 1970 prices to 2006 prices using the price index is as follows:

Price in 2006 dollars = (Price in 1970 dollars) x (2006 price index) / (1970 price index)

Price in 2006 dollars = ($8) x (180/38.8) = $37.11

Option c. $37.11 is the correct answer. The price of Ethel's bag of groceries from 1970 in 2006 prices, after adjusting for inflation using the price indices, is $37.11.

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