In Felixania,cat food constitutes 45 percent of the typical basket of goods for a typical consumer,dog food constitutes 3 percent,and all other goods constitute the remaining 52 percent.Assume the price of cat food rises by 4 percent,the price of dog food falls by 10 percent,and prices remain constant for all other goods.Based on the information given,we can definitely say
A) because the price of dog food fell by more than the price of cat food rose,the consumer price index (CPI)must have decreased.
B) the consumer price index (CPI)in Felixania is more than in the previous year.
C) if consumers get a 4 percent pay raise,they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI).
D) because cat food is a luxury (as is dog food),consumers are certainly no worse off in terms of their real wages as measured by the Felixanian consumer price index (CPI).
E) menu costs have decreased.

Question

Quizplus · Accepted Answer

The CPI is a measure of the average change in prices over time for a basket of goods and services. In this case, the price of cat food, which constitutes 45% of the basket, has increased by 4%, while the price of dog food, which constitutes 3% of the basket, has decreased by 10%. The prices of all other goods, which constitute 52% of the basket, have remained constant. Therefore, the overall CPI must have increased.

In Felixania,cat Food Constitutes 45 Percent of the Typical Basket