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Consider a small island economy with only two inhabitants, Tyler and Taylor. Suppose Tyler and Taylor consume only potatoes and fish: Tyler consumes 4 potatoes

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Consider a small island economy with only two inhabitants, Tyler and Taylor. Suppose Tyler and Taylor consume only potatoes and fish: Tyler consumes 4 potatoes and 6 fish a day, while Taylor consumes 6 potatoes and 4 fish a day. (Tyler has a few more cats to feed, but Taylor likes to feed a couple of birds that nest in a nearby tree.) Initially, prices are $1 a potato and $2 a fish. a) Calculate Tyler and Taylor's costs of living and their total expenditure. b) Now, suppose the price of potatoes increases to $2. Calculate the new costs of living and total expenditure. Calculate the CPI inflation rate. What would be the increase in Tyler and Taylor's costs of living, in dollars, according to the inflation rate you have just calculated? What are the actual increases in their costs of living? c) Does the CPI overestimate or underestimate the cost of living for Tyler? Does the CPI overestimate or underestimate the cost of living for Taylor? What is the underlying reason for these results? d) To deal with the harsher economic conditions, Taylor takes in a stray cat to scare away the birds from the tree. Now she consumes 4 potatoes and 5 fish. Re-calculate Taylor's actual increase in the cost of living and discuss your result in terms of the bias of the CPI. Par... v By E

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