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QUESTION 1 The Consumer Price Index (CPI) measures the changes of the prices paid by all...

QUESTION 1

  1. The Consumer Price Index (CPI) measures the changes of the

    prices paid by all businesses for a fixed market basket of production resources.

    prices paid by consumers for a fixed market basket of consumer goods and services.

    quantities of a fixed market basket of goods produced by businesses.

    prices paid by consumers and businesses for a fixed market basket of goods and services.

2 points   

QUESTION 2

  1. Market Basket 1990 (Base Year) 2010 2011
    Product Quantity Price Price Price
    A 7 $3 $5 $6
    B 11 $5 $8 $8
    C 20 $6 $8 $9
    D 15 $9 $13 $12

    If your answer is not a whole number, round to two decimal places.

    What is the cost of the market basket in 1990? $

    What is the cost of the market basket in 2010? $

    What is the cost of the market basket in 2011? $

    What is CPI in 1990?

    What is CPI in 2010?

    What is CPI in 2011?

    What was the inflation rate in 2011? %

18 points   

QUESTION 3

  1. The CPI is biased because it

    does not include services.

    takes into account the changes in product quality.

    does not always take into account the changes in product quality.

    takes into account the changes in technology.
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Homework Answers

Answer #1

1 - Option B

Price paid by the consumers for a fixed market basket of consumer goods and services.

Quantity is not the determining factor of CPI. The market basket of consumer and consumer goods is considered and not the businesses. Hence option B will be correct

2 -

Cost of basket in 1990 - 7*3 + 11*5 + 20*6+15*9

= 331

Cost of basket in 2010 = 7*5 + 11*8 + 20*8 + 15*13

= 478

Cost of basket in 2011 = 7*6 + 11*8 + 20*9 + 15*12

= 490

CPI of 1990 = 331/331*100

= 100

CPI of 2010 = 478/331*100

= 144.41

CPI of 2011 = 490/331*100

= 148.04

Inflarion rate in 2011 = 148.04-100

= 48.04 %

3 - Option C

Does not take into account the changes in product quality

This is called the quantity bias. There is technological change which is the reason for change in quality. But it is not considered in CPI. It includes services. Hence Option C will be correct.

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