Question

In Felixania, cat food constitutes 45 percent of the typical basket of goods for a typical consumer, dog food constitutes 3 percent, and all other goods constitute the remaining 52 percent. Assume the price of cat food rises by 4 percent, the price of dog food falls by 10 percent, and prices remain constant for all other goods. Based on the information given, we can definitely say:____________ a) because the price of dog food fell by more than the price of cat food rose, b) the consumer price index (CPI) must have decreased. 0 the consumer price index (CPI) in Felixania is more than in the previous year. c) if consumers get a 4 percent pay raise, they are worse off in terms of their real income compared to inflation as measured by the Felixanian consumer price index (CPI). d) because cat food is a luxury (as is dog food), consumers are certainly no worse off in terms of their real wages as measured by the Felixanian consumer price index (CPI). e) menu costs have decreased.

Answer 1

Answer:

the consumer price index (CPI) in Felixania is more than in the previous year.

Explanation:

cat food increase ⇒ 45% x 4% =  1.8% increase

dog food decrease ⇒ 3% x -10% = -0.3% decrease

the CPI increased by 1.8% - 0.3% = 1.5%

the consumer price index (CPI) measures the weighted average price of a basket of goods. Since the weight of cat food is much higher (15 times higher) than the weight of dog food, it would take an enormous decrease in the price of dog food to offset the small increase in the price of cat food.