Table 16-6.The table below applies to an economy with only two goods - hamburgers and hot dogs.The fixed basket consists of 4 hamburgers and 8 hot dogs.

-Refer to Table 16-6.Which of the following scenarios is consistent with this statement? "The cost of living increased by 25 percent between 2009 and 2011."

Question

Table 16-6.The table below applies to an economy with only two goods - hamburgers and hot dogs.The fixed basket consists of 4 hamburgers and 8 hot dogs.
 
-Refer to Table 16-6.Which of the following scenarios is consistent with this statement? "The cost of living increased by 25 percent between 2009 and 2011."

Quizplus · Accepted Answer

To calculate the cost of living, we need to calculate the cost of the fixed basket in both 2009 and 2011 and compare the percentage increase. The fixed basket in both years consists of 4 hamburgers and 8 hot dogs, which cost $20 in 2009 (4*$5 + 8*$1) and $25 in 2011 (4*$5.61 + 8*$3.63). This represents a 25% increase in the cost of living between 2009 and 2011. Option B shows that the price of hot dogs increased from $3.63 to $4.07 in 2011. This increase in the price of hot dogs led to an increase in the cost of the fixed basket and hence, an increase in the cost of living. The other options either do not affect the price of the fixed basket or affect the price of hamburgers, which are not a part of the fixed basket.