The Consumer Price Index (CPI) measures inflation for every individual. A) True, the weights used in calculating the CPI are adjusted for every individual in the country. B) True, people all face the same prices and therefore face the same inflation. C) False, the CPI uses weights based on how much each product represents in […]
Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets. Why? What will be an ideal response? ANSWER There is some substitutability between the goods, but imperfects sell for a lower price. Suppose, for example, the good sells […]
Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10% and the price of goose liver increases by 20%. The government raises Richard’s transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment […]
The Fisher index A) uses the arithmetic mean of the Paasche index and the Laspeyres index. B) uses the standard deviation of the Paasche index and the Laspeyres index. C) uses the geometric mean of the Paasche index and the Laspeyres index. D) uses the harmonic mean of the Paasche index and the Laspeyres index. […]
Under which of the following conditions will there be no substitution bias in the CPI? A) Lower-priced goods increase in price by a greater percentage than do higher-priced goods. B) Higher-price goods increase in price by a greater percentage than do lower-priced goods. C) All goods change in price by the same amount. D) All […]
The amount of money one would have to give to a consumer to offset the harm from a price increase is called A) compensating variation. B) structured settlement. C) equivalent variation. D) consumer surplus. ANSWER A
The amount of money one would have to take from a consumer to harm her by as much as the price increase is called A) compensating variation. B) structured settlement. C) equivalent variation. D) consumer surplus. ANSWER C
Employing a fixed-weight index like the Consumer Price Index to adjust a person’s salary in response to inflation will overcompensate this person because doing so will allow this person to A) buy the same bundle of goods as he did before the inflation. B) achieve a higher level of utility than he did before the […]
Using a Laspeyres index to calculate the Consumer Price Index (CPI) A) weights quantities with current prices. B) weights prices with base-year quantities. C) weights quantities with base-year prices. D) weights prices with current year quantities. ANSWER B
What is one way to adjust the CPI for substitution bias? A) Use the Paasche index. B) Use the Laspeyres index. C) Multiply the Paasche Index and the Laspeyres index. D) Take the geometric mean of the Paasche index and the Laspeyres index. ANSWER A
