Question 1
Percentage increases in price = 2015 price-2014 price2014 price × 100%
Percentage increase in the price of food = 6-44 × 100%
= 50%
Percentage increase in the price of clothing = 20-1010 × 100%
= 100%
Percentage increase in CPI
Market basket cost for 2014 = (4 × 50) + (10 × 10) = $300
CPI for 2014 = 300300 × 100% = 100
Market basket cost for 2015 = (6 × 50) + (20 × 10) = $500
CPI for 2015 = 500300 × 100% = 166.67
% increase in CPI = CPI for 2015-CPI for 2014CPI for 2014 × 100%
= 166.67-100100 × 100%
= 66.67%
Question 2: Problems of using CPI as a measure of cost of living
Substitution bias: Consumers usually substitute commodities whose price increase with those whose prices remain unchanged or decrease. CPI does not consider substitution effects. It, Continue reading...