What are the answers to part C,D,and E? Thanks! 9. Canadia, a small country betw

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What are the answers to part C,D,and E? Thanks!

9. Canadia, a small country between the US and Canada, produces only maple syrup and hot cocoa. A typical household consumes is 10 liters of maple syrup and 20 gallons of hot cocoa per year, and the table be low shows Canadia's production of maple syrup and hot cocoa from 2010 through 2012: Maple Syrup Price Hot Cocoa Quantity (liters) 100 120 130 Quantity (gallons) 200 400 600 Price $5 $8 $10 2010 $25 $35 2011 2012 A) Use 2011 as the base year and calculate inflation between 2010 and 2012 using the CPIs for this nation. B) Using 2011 as the base year, calculate inflation between 2010 and 2012 using the GDP deflators for this nation C) In one sentence or less, explain why these measures of inflation are not necessarily equal. D) The federal government adjusts transfer payments to reflect the cost of living. Which of the mcasures payments? Why? E) If the federal government was paying the average Social Security re cipient in Canadia $500/month in 2010, how much would the government have to pay Social Security recipients in 2012 so that they can alford the same lifestyle as in 2010? should the government u se to index transfer

Explanation / Answer

Answer:-

?c)

It is a tendency among the consumers to search for the lowest prices for the commodities they buy. This leads to Outlet Substitution Bias where consumers do not hesitate in driving to other outlets situated far away in search for the lowest prices. They do not internalize the time they spend in just searching for the best deal.

Commodity Substitution Bias can occur when consumers replace the old commodity they were using and start purchasing its closest substitute just because the price of the former has risen. CPI does not count these biases and hence is different from GDP deflator CPI

?d) Inflation using the CPI because cost of living is best captured by CPI. GDP deflator is useful for core inflation for the overall economy while CPI is used for cost of living index.

COLA (cost-of-living adjustment) contracts revise the nominal income with the inflation rate such that nominal income rises automatically by the same percentage as the inflation rate. This implies that the real income of the consumer remains the same.

?e)

500+500(0.50)=$750

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