In Bovania,milk constitutes 56% of the typical basket of goods for a typical consumer.Let's say the price of milk rises by 4% and the prices of all other goods fall by 10%.Based on the information given,we can definitely say:
A) the consumer price index (CPI) in Bovania is greater than in the previous year.
B) the CPI in Bovania is less than in the previous year.
C) if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Bovanian CPI.
D) because milk is a necessity, consumers are automatically worse off no matter what pay increase they may have received.
E) shoe-leather costs have decreased.

Question

Quizplus · Accepted Answer

Since the price of milk has risen by 4% and the prices of all other goods have fallen by 10%, the overall effect would be a decrease in the cost of the typical basket of goods. This means that the CPI in Bovania is less than in the previous year.

In Bovania,milk Constitutes 56% of the Typical Basket of Goods