Question

To look at changes in the cost of living, we dont track the differences in each households actual expenditures from one year to the next on a market basket because:

Instructions: You may select more than one answer. Click the box with a check mark for correct answers, and click to empty the box for the wrong answers.

a） consumers may substitute the relatively expensive goods with those goods whose prices have not increased rapidly as certain goods become more expensive.

b) actual expenditures may include spending outside the country.

c) people’s consumption patterns may change due to tastes or changes in income that have nothing to do with changing prices.

d) innovation can lead to the introduction of new products or improvements on existing products.

e) actual expenditures may include spending on goods and services used as inputs in the production process.

Answer 1

To calculate the cost of living, the differences in each individual households expenditure is not evaluated because (c) people’s consumption patterns may change due to tastes or changes in income that have nothing to do with changing prices. Cpi is calculated as the average change in the prices of the basket of goods and services and not difference in individual expenditure on goods as each individual will have his own preferences and ability to buy particular goods and services due to his income.