Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

Question

a. neither the price of pretzels nor the price of cookies changes from year to year.
b. the number of pretzels bought by the typical consumer is equal to the number of cookies bought by the typical consumer in each year.
c. the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year.
d. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.

Answer 1

To compute the consumer price index (CPI) for an economy over two or more consecutive years, we typically assume that the quantity consumed remains constant over the period for which we are measuring price changes. This allows us to isolate the effects of price changes on the overall cost of living for consumers.

Given your options, the assumption that best aligns with the method for calculating the CPI is:

d. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year.

This assumption helps to ensure that any changes in the CPI reflect purely the changes in prices rather than changes in consumption patterns. Other options either imply constant prices or force conditions on consumption that would not help isolate the price effects needed for CPI calculation.