The price of long-distance telephone service fell from 40 cents per minute in 1996 to 22 cents per minute in 1999, a 45-percent (18 cents/40 cents) decrease. Suppose that the Consumer Price Index increased by 88 percent over this period. What happened to the real price of telephone service?

What happened was that the real price dropped by 50%

Explanation:

To know what happened to the actual price, we must calculate the actual price of the telephone service in 1996 and 1999. To do this, we must match the CPI from q996 to 1 and the 1999 CPI to 1.1, which means that there was an increase 10% each year. Now we must divide the price the nominal price of each year by the CPI value of each year.

Thus we will have, for 1996 40/1 which is equal to 40 cents, and we will have for 1999 22 / 1.1, which will be equal to 20 cents. Now if we compare 40 cents with 20 cents, we will realize that the real price has dropped by 50%.

What happened was that the real price dropped by 50%