Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Chapter 22, Problem 25CTQ
Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this Change affect the amount of substitution bias and quality/new goods bias?
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Question 3.
Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?
Provide graphs where applicable
Suppose you earn an income of $50000 a year. You purchase the bundle of goods and services on your budget constraint line that maximizes your utility. The budget constraint line is shown in the graph below.
Over the next year, prices for goods and services increase overall by %5 because of inflation, but your income remains fixed at $50000. Which graph illustrates this change?
Suppose housing constitutes 45% of the typical basket of goods for a typical consumer, education constitutes 3%, and all other goods make up the remaining 52%. Assume the price of housing rises by 4%, the price of education falls by 10%, and prices remain constant for all other goods. Based on the information given, we can definitely say
Select one:
a.because the price of education fell by more than the price of housing rose, the consumer price index (CPI) must have decreased.
b.the CPI is higher 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 the CPI.
d.because housing is a luxury (as is education), consumers are certainly no worse off in terms of their real wages as measured by the CPI.
e.the CPI is unchanged from the previous year.
Chapter 22 Solutions
Principles of Economics 2e
Ch. 22 - Table 22.4 shows the fruit prices that the typing...Ch. 22 - Construct the price index for a fruit basket in...Ch. 22 - Compute the inflation rate for fruit prices from...Ch. 22 - Edna is living in a retirement home where home...Ch. 22 - How to Measure Changes in the Cost of Living...Ch. 22 - The Consumer Price Index is subject to the...Ch. 22 - Go to this website...Ch. 22 - If inflation rises unexpectedly by 5, would a...Ch. 22 - How should an increase in inflation affect the...Ch. 22 - A fixed-rate mortgage has the same interest rate...
Ch. 22 - How do economists use a basket of goods and...Ch. 22 - Why do economists use index numbers to measure the...Ch. 22 - What is the difference between the price level and...Ch. 22 - Why does substitution bias arise if we calculate...Ch. 22 - Why does the quality/new goods bias arise if we...Ch. 22 - What has been a typical range of inflation in the...Ch. 22 - Over the last century, during what periods was the...Ch. 22 - What is deflation?Ch. 22 - Identity several parties likely to he helped and...Ch. 22 - What is indexing?Ch. 22 - Name several forms of indexing in the private and...Ch. 22 - Inflation rates, like most statistics, are...Ch. 22 - Given the federal budget deficit in recent years,...Ch. 22 - Why is the GDP deflator not an accurate measure of...Ch. 22 - Imagine that the government statisticians who...Ch. 22 - Describe a situation, either a government policy...Ch. 22 - Describe a situation, either a government policy...Ch. 22 - Why do you mink the U.S. experience with inflation...Ch. 22 - If, over time, wages and salaries on average rise...Ch. 22 - Who in an economy is the big winner from...Ch. 22 - If a government gains from unexpected inflation...Ch. 22 - Do you think perfect indexing is possible? Why or...Ch. 22 - The index number representing the price level...Ch. 22 - The total price of purchasing a basket of goods in...Ch. 22 - With in 1 or 2 percentage points, what has the...Ch. 22 - If inflation rises unexpectedly by 5, indicate for...Ch. 22 - Rosalie the Retiree knows that when she retires in...
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- By not taking into account consumers' ability to substitute toward goods that become relatively cheaper over time, the CPI Group of answer choices may overstate or understate the increase in the cost of living, depending on how quickly prices rise., (Incorrect answer)may overstate or understate the increase in the cost of living, depending on how quickly prices rise. may overstate or understate the increase in the cost of living, regardless of how quickly prices rise. understates the increase in the cost of living. overstates the increase in the cost of living.arrow_forwardMicroeconomic substitution is impossible for the economy as a whole because a. money is a veil. b. the prices of some goods and services adjust sluggishly in response to changing economic conditions. c. a lower price level increases real wealth, which stimulates spending by consumers and vice-versa. d. real GDP measures the total quantity of goods and services produced by all firms in all markets.arrow_forwardSuppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.arrow_forward
- Efficiency requires that no more trades can be made between people, or equivalently, that their marginal rates of substitution (MRS) be equal for all goods they consume. Yet you and I never trade anything between each other, so how and when can we be sure we have equal MRS's?arrow_forwardIs it possible for there to be inflation present in the economy and still witness a decline in a large number of goods? If so, how and why is this possible?arrow_forwardUse the principle of substitution to predict the effect in each of the following situations. a)During the past 30 years, technological advances in the computer industry have led to dramatic reductions in the prices of personal and business computers. At the same time, real wages have increased slowly. b)The ratio of land costs to building costs is much higher in big cities than in small cities. c)A new collective agreement results in a significant increase in wages for pulp and paper workers.arrow_forward
- Consider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)?arrow_forwardWhy does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of goods?arrow_forwardConsider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)? How much units will increase for both x₁ and x₂?arrow_forward
- Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain. with simple examplearrow_forwardWhat is the effect of the sources of bias on the CPI calculation? A. Changes in relative prices lead consumers to change the items they buy, and the CPI reflects this substitution. B. The new goods bias injects a downward bias into the CPI. C. When faced with higher prices, people use discount stores more frequently and convenience stores less frequently, but the CPI doesn't include this outlet substitution. D. When the quality of a good improves over time, the CPI doesn't include the portion of the price rise attributable to the higher quality in its calculation.arrow_forward(Substitution and Income Effects) Suppose that the cost of living increases, thereby reducing the purchasing power of your income. If your money wage doesn’t increase, you may work more hours because of this cost-of-living increase. Is this response predominantly an income effect or a substitution effect? Explain.arrow_forward
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