Question

Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of coffee rises from $2 to $2.50 . If the CPI rises from 150 to 200 people will likely buy

a. more ice cream and more coffee. b. more ice cream and less coffee. c. less ice cream and more coffee. d. less ice cream and less coffee

Answer 1

Since price rises by 33% on an average whereas ice cream price rises by 25% and coffee price rises by 25%.

Since price of ice cream and coffee price is relatively cheaper then other product which makes the consumption of these good increases due to substitition effect.

When income increases according to CPI then more icecream and more coffee will be purchased.

Thus ans is A

When income remains same then less icecream and less coffee should be purchased.

But go with A