Assume there is a simple economy where people consume only two goods, food and clothing.

Assume there is a simple economy where people consume only two goods, food and clothing.

1) Assume there is a simple economy where people consume only two goods, food and clothing. Further assume that the market basket of goods used to compute the CPI consists of 100 units of food and 20 units of clothing.

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Yearly Price per UnitFoodClothing
 

2004 price per unit

 

$8

 

$20

 

2005 price per unit

 

$12

 

$40

 

a. Compute the percentage changes in the price of food and the percentage change in the price of clothing between 2004 and 2005.

b. Calculate the percentage change in the CPI between 2004 and 2005.

c. Do you think the CPI price changes affect all consumers in the economy to the same extent? If not, how do you determine who “wins” and who “loses” in this particular situation? Explain.

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