Q. Good Quantity Price Coffee 3 lb $8/lb Bread 3 loaves $1/loaf Tea 1 lb $15/lb

Question

Q. Good Quantity Price Coffee 3 lb $8/lb Bread 3 loaves $1/loaf Tea 1 lb $15/lb Aspirin 1 200-tablet bottle $2/bottle Cola 1 case $6/case A) Assume that the mix of goods in a basket is kept constant for long periods. If the price of one good rises very rapidly over several years, what will happen to the relative importance of the other goods in the basket? Is this a problem? B) If the price of coffee increases, we get a positive rate of inflation, even if no other price rises. Is this really inflation? Explain.

Explanation / Answer

A) if price of one good rises very rapidly it may have effect on the other goods. for example, tea and coffee are alternate goods, i.e. they can be substituted for each other. so if the price of tea increases rapidly then the consumer will prefer to shift to coffee and therefore the demand for coffee will go up. B) if the price of coffee rises the demand for coffee decreases, thus giving rise to inflation....what will happen is that the consumer will preffer to shift from coffe to tea...

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