Question: The typical consumer's food basket in the base year 2012 is as follows: 30 chickens at $3.00 each 10 hams at $6.00 each 10 steaks

The typical consumer's food basket in the base year 2012 is as follows:
30 chickens at $3.00 each 10 hams at $6.00 each 10 steaks at $8.00 each
A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2013. Hams rise to $7.00 each, and the price of steaks is unchanged.
a. Calculate the change in the "cost-of-eating" index between 2012 and 2013.
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?

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a The cost of the basket in 2012 is 90 60 80 230 In 2013 t... View full answer

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