The following observations are made of prices and quantities of goods purchased by consumers in an economy over two years. Durable goods Price Quantity Price Quantity Services Year 1 $20 200 $500 4. Year 2 $21 200 $600 Assuming the consumer price index (CPI) is based on the basket of goods from year 1, calculate the CPI inflation rate between years 1 and 2. Is the increase in the cost of buying the year-2 basket of goods between the two years greater or smaller than CPI inflation? Does this example illustrate the substitution bias of the CPI? Briefly explain your answer foo
The following observations are made of prices and quantities of goods purchased by consumers in an economy over two years. Durable goods Price Quantity Price Quantity Services Year 1 $20 200 $500 4. Year 2 $21 200 $600 Assuming the consumer price index (CPI) is based on the basket of goods from year 1, calculate the CPI inflation rate between years 1 and 2. Is the increase in the cost of buying the year-2 basket of goods between the two years greater or smaller than CPI inflation? Does this example illustrate the substitution bias of the CPI? Briefly explain your answer foo
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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