The table below shows the 'hypothetical' basket(s) of consumption goods for a 'typical' Penn State college student for 2012 and 2013. Answer the following questions using the information in the table.
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2012 Basket for 'typical PSU college student'
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2013 Basket for 'typical PSU college student'
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Item
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Price
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Quantity
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Item
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Price
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Quantity
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Textbooks
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$80
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6
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Textbooks
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$90
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6
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Rent
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$700
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1
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Rent
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$800
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1
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|
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PSU sporting events
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$15
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6
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PSU sporting events
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$20
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3
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|
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Dinners in State College
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$25
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6
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Dinners in State College
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$25
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8
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a. Calculate the rate of inflation between 2012 and 2013 assuming 2012 is the base year. Please show all work. Note, calculate the rate of inflation using price indexes.
b. Now update the base year to 2013 and recalculate the rate of inflation between 2012 and 2013. Again, show all work! Calculate the rate of inflation using price indexes.
c. Which rate of inflation accounts for the substitution bias? In your answer, identify and explain why, using relative prices, the substitution that this PSU college student rationally made.
d. Calculate the 'Chain Weighted' rate of inflation (again, show all work).