Question

My answer is that people should buy same amount for both T-shirt and milk. The reason is that that since the price rate increased for T-shirts and milk is the same as the price level increased, which is 25%. Therefore, people should be buying same amount of T-shirt and milk.

Could anyone tell me where I got wrong in this question?

Suppose the price of a quart of milk rises from $1 to $1 150 to 175, then people likely will buy a. more milk and more T-shirts b. more milk and fewer T-shirts. c. less milk and more T-shirts. d. less milk and fewer T-shirts .25 and the price of a T-shit rises from $8 to $10. If the CPI rises fror 125- to -t une Gnn

Answer 1

CPI has increased from 150 to 175.

Calculate the inflation rate -

Inflation rate = [(175 - 150)/150] * 100

Inflation rate = [25/150] * 100

Inflation rate = 16.67%

Thus,

The general price level in economy has increased by 16.67%.

Price of milk has increased from $1 to $1.25

% increase in price of milk = [(1.25 - 1)/1] * 100 = 25%

Price of T-shirts rises from $8 to $10.

% increase in price of T-shirt = [(10 - 8)/8] * 100 = 25%

Since, prices of both milk and T-shirt has increased more than the increase in the general price level, people likely will buy less milk and fewer T-shirts.

Hence, the correct answer is the option (d).