Assume that consumers consider rice and potatoes to be substitutes, so that when the price of rice rises, consumers purchase less rice and more potatoes. When the CPI is computed following the increase in the price of rice, it takes into account

A the increase in the price of rice.

B the decrease in the quantity of rice purchased and the increase in the quantity of potatoes purchased.

C Both (a) and (b) are correct.

D None of the above is correct.

Question

Dylan Reed

Business

12 December, 05:42

Assume that consumers consider rice and potatoes to be substitutes, so that when the price of rice rises, consumers purchase less rice and more potatoes. When the CPI is computed following the increase in the price of rice, it takes into account

A the increase in the price of rice.

B the decrease in the quantity of rice purchased and the increase in the quantity of potatoes purchased.

C Both (a) and (b) are correct.

D None of the above is correct.

+1

Answers (1)

Know the Answer?

Chivas · Answer 1

The correct answer is letter "A": the increase in the price of rice.

Explanation:

The Consumer Price Index, or CPI, is considered the American economy's benchmark inflation guide. The CPI uses the basket of goods to assess a stable year-to-year product base placing special attention on the price of products that consumers buy and use every day.

Thus, the CPI will consider the increase in the price of potatoes if that situation happens in a given market.