In Felixania,cat Food Constitutes 45% of the Typical Basket of Goods

question 106

Multiple Choice

In Felixania,cat food constitutes 45% of the typical basket of goods for a typical consumer,dog food constitutes 3%,and all other goods constitute the remaining 52%.Assume the price of cat food rises by 4%,the price of dog food falls by 10%,and the prices for all other goods remain constant.Based on the information given,we can definitely say:

• A) because all consumers are the same, all consumers must be worse off as a result of the change.
• B) because the goods included in the consumer price index (CPI) necessarily change from year to year, we can't determine the value of the new CPI.
• C) if consumers get a 4% pay raise, they are worse off in terms of their real income compared to inflation as measured by the Felixanian CPI.
• D) if consumers get at 4% pay raise, they are better off in terms of their real income compared to inflation as measured by the Felixanian CPI.
• E) menu costs have decreased.

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Definitions:

Economic Rent

The extra income earned by a resource over and above its opportunity cost, often due to natural advantages or market conditions.

Inelastic Demand Curve

Represents a situation where the demand for a product changes by a smaller percentage than changes in its price, indicating consumers' insensitivity to price changes.

Perfectly Elastic

A situation where the demand or supply for a product is infinitely responsive to changes in price, shown as a horizontal line on a graph.

Loanable Funds

A concept in economics that describes the market where savers supply funds for loans to borrowers.