John Smith, a factory worker at an automobile plant in the city Detrigan, makes $25 per hour. His dad, Larry Smith who retired from a plant in the same city ten years back, was earning an average of $10 per hour at the time of retirement. Looking at the CPI, John concludes that a factory worker's purchasing power is lower now compared to ten years ago. Larry, however, does not agree that purchasing power has fallen. According to him, this conclusion cannot be drawn from such limited data. Which of the following, if true, would weaken John's claim that the average factory worker's purchasing power has fallen?

Question

Zechariah Alvarez

Business

18 February, 14:59

John Smith, a factory worker at an automobile plant in the city Detrigan, makes $25 per hour. His dad, Larry Smith who retired from a plant in the same city ten years back, was earning an average of $10 per hour at the time of retirement. Looking at the CPI, John concludes that a factory worker's purchasing power is lower now compared to ten years ago. Larry, however, does not agree that purchasing power has fallen. According to him, this conclusion cannot be drawn from such limited data. Which of the following, if true, would weaken John's claim that the average factory worker's purchasing power has fallen?

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Taliyah · Answer 1

Full question:

John Smith, a factory worker at an automobile plant in the city Detrigan, makes $25 per hour. His dad, Larry Smith who retired from a plant in the same city ten years back, was earning an average of $10 per hour at the time of retirement. Looking at the CPI, John concludes that a factory worker's purchasing power is lower now compared to ten years ago. Larry, however, does not agree that purchasing power has fallen. According to him, this conclusion cannot be drawn from such limited data. Which of the following, if true, would strengthen Larry's claim that the CPI calculations are inconclusive?

A. The inflation rate in Detrigan had turned negative 3 years back during a recession.

B. The level of inflation in Detrigan is expected to increase following the recent cut in interest rates.

C. The government recently increased the weightage given to food in the CPI to reflect spending patterns.

D. The basket of goods that constitute the CPI is due for its first revision in fifteen years

E. The base year used in the calculation of the price indexes in the country has been revised every two years or so.

Answer:

The basket of goods that constitute the CPI is due for its first revision in fifteen years.

Option D

Explanation:

The customer price index (CPI) is described as the calculated average price of the bundle of goods and services like medical costs, transportation, food, etc. and it is calculated or compared with the CPI of the index reference period normally referred to as the base year. It is calculated by averaging the prices of the basket goods and it is used to determine the cost of living.

Comparing CPI from different periods requires evaluating the fixed basked of goods during the base period and examining the consumption patterns over time. It can also be represented as a ratio of base period to the current period or period of interest.