Question

Suppose the price of a gallon of ice cream rises from $4 to $5, and the price of a can of coffee rises from $2 to $2.50. If the CPI rises from 150 to 177, then people likely will buy a. less ice cream, less coffee b. less ice cream, more coffee c. more ice cream, more coffee d. more ice cream, less coffee

Answer 1

Answer:

a. less ice cream, less coffee

Explanation:

The percentage change in CPI is given by:

$\%CPI = \frac{177-150}{150}=0.18$

The percentage change in the prices of coffee and ice cream, respectively, are:

$\%C = \frac{5-4}{4}=0.25\\\%I = \frac{2.50-2.00}{2.00}=0.25$

Both coffee and ice cream had an increase in price above the CPI increase, which means that both goods are being sold above the equilibrium price and thus their demand is likely to fall.

People likely will buy less ice cream, less coffee