The typical consumers food basket in the base year 2015 is as follows: 30 chickens at $3.00

Question:

The typical consumer’s food basket in the base year 2015 is as follows:

30 chickens at $3.00 each 10 hams at $6.00 each 10 steaks at $8.00 each A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is unchanged.

(LO1, LO3)

a. Calculate the change in the “cost-of-eating” index between 2015 and 2016.

b. Suppose that consumers are completely indifferent between two chickens and one ham. For this example, how large is the substitution bias in the official “costof-eating” index?

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