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Which is likely to have the larger effect on the CPI, a 2 percent increase in...

Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

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Answer #1

Answer: 2% increase in food

Consumer price index (CPI) depends on the market basket of various important items like food, medical care, clothing, etc. Such market basket is the weighted average of market prices and respective quantities. Food takes a huge part in the market basket, since it requires for survival. A slight increase (like 2%) in an item (like food) makes the basket very large, which creates large effect on CPI.

The item like diamond ring is not so necessary – it may be treated as luxury good. It covers a little part in the market basket. Therefore, the increase in diamond ring doesn’t have larger effect compare to the increase in food item.

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