Consider That a Consumer Likes Chicken and Beef Equally Well

question 8

Multiple Choice

Consider that a consumer likes chicken and beef equally well and in the base year consumes equal amounts of each.If the price of chicken rises sharply next year,she will eat beef almost exclusively.The official CPI,which uses the base year basket as a measure the cost of living,will

• A)be biased upward.
• B)be biased downward.
• C)underestimate the true cost of living.
• D)reflect the true changes in the cost of living.

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Definitions:

Compounded Quarterly

The method of calculating interest where the interest is added to the principal sum four times a year.

Compounded Annually

A method of calculating interest where the interest earned over a year is added to the principal, and the sum becomes the principal for the next year.

Future Value

The value of an investment or loan at a specific date in the future, calculated using the current value and the expected rate of growth or interest.

Future Value

Future Value is the estimated amount of money that an investment will grow to over a specified period of time, assuming a certain rate of interest or rate of return.