2)Remember the chips and salsa economy from Lab 4? No? Well, assume that only two goods matterin this economy: "chips" and "salsa." Suppose that the consumers in this economy are indifferent, i.egain the same amount of utility, from the following combinations of chips and salsa (6-monthconsumption):Chips(in lbs)Salsa(in quarts)2014030905050704011030Use this information to answer the questions below.Suppose that, in the year 2021, the price of a pound of chips is $1.00, and the price of a quart ofa)salsa is $3.00. Find the cost-minimizing combination of chips and salsa from the table above andcalculate the total expenditure necessary to purchase this bundle.Now suppose that, in 2022, the price of a pound of chips is $4.00 and the price of a quart of salsab)is $3.00. How much would it cost to purchase the chips/salsa combination from part (a)?c)Find the new minimum-cost bundle using the 2022 prices.d)Compute the Consumer Price Index (CPI) in this economy using the prices from 2021 as thebase-year prices that is, use your answers from (a) and (b) to obtain the CPI.Compare the amount of consumer spending from part (b) and part (c). How does this compare toe)the cost-of-living changes measured by the CPI?

Question
Asked Nov 14, 2019
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d) and e)

2)
Remember the chips and salsa economy from Lab 4? No? Well, assume that only two goods matter
in this economy: "chips" and "salsa." Suppose that the consumers in this economy are indifferent, i.e
gain the same amount of utility, from the following combinations of chips and salsa (6-month
consumption):
Chips
(in lbs)
Salsa
(in quarts)
20
140
30
90
50
50
70
40
110
30
Use this information to answer the questions below.
Suppose that, in the year 2021, the price of a pound of chips is $1.00, and the price of a quart of
a)
salsa is $3.00. Find the cost-minimizing combination of chips and salsa from the table above and
calculate the total expenditure necessary to purchase this bundle.
Now suppose that, in 2022, the price of a pound of chips is $4.00 and the price of a quart of salsa
b)
is $3.00. How much would it cost to purchase the chips/salsa combination from part (a)?
c)
Find the new minimum-cost bundle using the 2022 prices.
d)
Compute the Consumer Price Index (CPI) in this economy using the prices from 2021 as the
base-year prices that is, use your answers from (a) and (b) to obtain the CPI.
Compare the amount of consumer spending from part (b) and part (c). How does this compare to
e)
the cost-of-living changes measured by the CPI?
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2) Remember the chips and salsa economy from Lab 4? No? Well, assume that only two goods matter in this economy: "chips" and "salsa." Suppose that the consumers in this economy are indifferent, i.e gain the same amount of utility, from the following combinations of chips and salsa (6-month consumption): Chips (in lbs) Salsa (in quarts) 20 140 30 90 50 50 70 40 110 30 Use this information to answer the questions below. Suppose that, in the year 2021, the price of a pound of chips is $1.00, and the price of a quart of a) salsa is $3.00. Find the cost-minimizing combination of chips and salsa from the table above and calculate the total expenditure necessary to purchase this bundle. Now suppose that, in 2022, the price of a pound of chips is $4.00 and the price of a quart of salsa b) is $3.00. How much would it cost to purchase the chips/salsa combination from part (a)? c) Find the new minimum-cost bundle using the 2022 prices. d) Compute the Consumer Price Index (CPI) in this economy using the prices from 2021 as the base-year prices that is, use your answers from (a) and (b) to obtain the CPI. Compare the amount of consumer spending from part (b) and part (c). How does this compare to e) the cost-of-living changes measured by the CPI?

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Expert Answer

Step 1

(d) Consumer price index (CPI) measures the change in the price for a particular basket of good and can be calculated as the ratio of cost of basket in the given year and cost of basket in the base year.

From p...

Cost of basket in the given year
x 100
CPI
Cost of basket in the base year
400
x 100
190
CPI
CPI 210.52
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Cost of basket in the given year x 100 CPI Cost of basket in the base year 400 x 100 190 CPI CPI 210.52

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