Question

If food prices increase by 10%, and people always spend 25% of their total consumption expenditure on food, how much will the CPI increase (all other prices stay the same)?

(No handwritings answer, please. I can't read most of the handwriting. In text/typing/word format would be great). Thanks

Answer 1

25% of consumption expenditure on food means food shares 1/4th of total expenditure on the consumption.

Since, CPI is measured by the change in the price of fixed basket of goods and services that a typical consumer/household consumes.

Thus, food shares 1/4th of the total change in expenditure on that basket.

Hence, a 10% of change in food prices will cause the price of basket to be change by  $\fn_cm \frac{1}{4}\times10\%$  

$\fn_cm \Rightarrow 2.5 \%$

As the change is increase in food prices hence, CPI will increase by 2.5%.