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Exponential & Log Applications - Exercise 2 - Inflation

An 80 year old home is selling for $85,000 in the year 2006 and features the same type of siding, roof, kitchen, and bathroom that it had when it sold for $65,000  in the year 2000.  The inflation rate over this period averages 2.8% and one can assume this rate compounds continuously. 

Is the $85,000 price reasonable?  In other words, is the 2006 price of this house higher than can be explained by inflation? Use the continuous compounding formula A = Pert where A is the price after inflation, P is the original price, r is the inflation rate, and t is the number of years after the year 2000.  Just plug into the formula and be able to explain your answer. No Further Justification is Needed.

STATEMENT JUSTIFICATION
A = Pert, r=0.028, t=6

A = Yr-2006 Price Adjusted For Inflation
P = Yr=2000 Price = $65000

 

 

 

Given

Given

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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