SOLUTION: The price of a refirgerator is $1,200. If the rate of inflation in the next three year averages 3% per year and the real cost of the refrigerator remains unchanged in that time, w

Question 4918: The price of a refirgerator is $1,200. If the rate of inflation in the next three year averages 3% per year and the real cost of the refrigerator remains unchanged in that time, what will the price of the refrigerator be in three years?
Answer by Abbey(339) (Show Source): You can put this solution on YOUR website!
the refrigerator currently costs 1200.
Let's say this is 100% and we are in year zero
In year one the refrigerator will be 103%(.03 times year one value + year one value)
In year two the refrigerator will increase an additional 3%, BUT it is 3% of year one's value (.03*103+103)=106.09
In year three, the refrigerator again increases 3% of year two's value, so it is (.03*106.09+106.09)=109.273%
So if we multiply 1.09273 by the current cost, we see that the refrigerator will cost $1,311.27

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