Suppose the price of a carton of ice cream rises from

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Principles of Microeconomics
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Chapter 8 / Exercise 1
Principles of Microeconomics
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14. Suppose the price of a carton of ice cream rises from $4 to $5 and the price of coffee rises from $2 to $2.50. If the CPI rises from 150 to 200, what will people likely buy? a. more ice cream and more coffee b. more ice cream and less coffee c. less ice cream and more coffee d. less ice cream and less coffee
15. By not taking into account the possibility of consumer substitution, how is the CPI biased?
16. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. Why is this?
17. When the quality of a good improves, what happens to the purchasing power of the dollar? 46
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Principles of Microeconomics
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Chapter 8 / Exercise 1
Principles of Microeconomics
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Junjie Liu – Econ 105 Practice Multiple Choice
18. When the quality of a good deteriorates, what happens to the purchasing power of the dollar? a. It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. b. It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. c. It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. d. It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.

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