EXAMPLE 2 The mountain man price index
Bill Smith lives in a cabin in the mountains and strives for self-sufficiency. He buys only salt, kerosene, and the services of a professional welder. Here are Bill’s purchases in 1990, the base period. His cost, in the last column, is the price per unit multiplied by the number of units he purchased.
| Good or service | 1990 quantity | 1990 price | 1990 cost |
|---|---|---|---|
| Salt | 100 pounds | $0.50/pound | $50.00 |
| Kerosene | 50 gallons | 0.80/gallon | 40.00 |
| Welding | 10 hours | 13.00/hour | 130.00 |
| Total cost = | $220.00 |
The total cost of Bill’s collection of goods and services in 1990 was $220. To find the “Mountain Man Price Index” for 2015, we use 2015 prices to calculate the 2015 cost of this same collection of goods and services. Here is the calculation:
370
| Good or service | 1990 quantity | 2015 price | 2015 cost |
| Salt | 100 pounds | $0.65/pound | $65.00 |
| Kerosene | 50 gallons | 1.50/gallon | 75.00 |
| Welding | 10 hours | 23.00/hour | 230.00 |
| Total cost = | $370.00 |
The same goods and services that cost $220 in 1990 cost $370 in 2015. So the Mountain Man Price Index (1990 = 100) for 2015 is