The typical consumer's food basket in the base year 2015 is as follows:
30 chickens at $3 each
10 hams at $5 each
10 steaks at $8 each
A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each, and the price of steaks is unchanged.
a. Calculate the change in the "cost-of-eating" index between 2015 and 2016.
Cost of eating 2015=
Cost of eating 2016=
The cost of eating index has (increased/decreased) by %
b. Suppose that consumers are completely indifferent between two chickens and one ham. For this example, how large is the substitution bias in the official "cost-of-eating" index?
The in the cost-of-eating index is %.
The of inflation in the cost of eating reflects substitution bias.