Tutorial 2_2011 _answer for students_

Tutorial 2_2011 _answer for students_ - ECON1002...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON1002 Introductory Macroeconomics, S1 2011 TUTORIAL 2 (Week beginning 14 th March) *1. A typical consumer’s food basket in the base year 2000 is as follows: 30 chickens at $3 each 10 hams at $6 each 10 steaks at $8 each A chicken feed shortage causes the price of chickens to rise to $5 each in the year 2001. Hams rise to $7 each, and the price of steaks is unchanged. a. Calculate the change in the ‘cost-of-eating’ index between 2000 and 2001. The cost of the basket in 2000 is $90 + $60 + $80, or $230. In 2001, the cost is $150 + $70 + $80, or $300. The official ‘cost of eating’ has increased by ($300 – $230)/$230 or 30.4% between 2000 and 2001. b. Suppose that consumers are completely indifferent between 2 chickens and 1 ham. For this example, how large is the substitution bias in the official ‘cost-of-eating’ index? Since two chickens now cost more than one ham, people will switch from 30 chickens to 15 hams, for a total ham consumption of 25. The cost of the food basket is now 25 hams at $7.00 plus 10 steaks at $8.00, or $255. The true increase in the cost of eating is ($255 – $230)/$230, or 10.9%, much lower than the official estimate of 30.4%. The overestimate of inflation in the cost of eating reflects substitution bias.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/18/2011 for the course ECON 1002 taught by Professor Markmelatos during the Three '10 term at University of Sydney.

Page1 / 2

Tutorial 2_2011 _answer for students_ - ECON1002...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online