The typical consumers food basket in the base year 2015 is as follows:
Question:
The typical consumer’s food basket in the base year 2015 is as follows:
32 chickens at $4 each
15 hams at $7 each
10 steaks at $8 each
A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is unchanged.
a. Calculate the change in the “cost-of-eating” index between 2015 and 2016.
| Year | Cost of the basket |
| 2015 | $ |
| 2016 | $ |
Instructions: Enter your responses rounded to one decimal place.
The official cost-of-eating index has (Click to select) increased decreased by %.
b. Suppose that consumers are completely indifferent between two chickens and one ham. For this example, how large is the substitution bias in the official “cost-of-eating” index?
The increase decrease in the cost-of-eating index is %. The (Click to select) underestimate overestimate of inflation in the cost of eating reflects substitution bias.
Expert Answer:
To calculate the change in the costofeating index between 2015 and 2016 we first need to determine t... View the full answer
