Consider a small economy in which consumers buy only two goods: apples and pears.In order to compute the consumer price index for this economy for two or more consecutive years,we assume that
A)the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in each year.
B)neither the number of apples nor the number of pears bought by the typical consumer changes from year to year.
C)the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year.
D)neither the price of apples nor the price of pears changes from year to year.

Question

Quizplus · Accepted Answer

The consumer price index (CPI) measures the average change in prices of goods and services consumed by households over time. In this small economy, where apples and pears are the only goods consumed, the CPI can be calculated by taking the average price of these two goods weighted by the quantities purchased by the typical consumer. Since the CPI is a measure of inflation, it is important to hold the quantities of goods consumed constant over time to isolate the effect of price changes. Therefore, choice B is the best choice as it assumes that the typical consumer purchases the same quantities of apples and pears in each year.

Consider a Small Economy in Which Consumers Buy Only Two