Question

the nation of kona cultivates coffee beans and cassava, from which all their consumer goods are produced. (a) calculate the cost of the market basket of goods in the table in 2010 and in 2015 . show your work. (b) use 2010 as the base year to calculate the price indices for 2010 and 2015 for the market basket of goods in the table. show your work. (c) in order for a citizen of kona to maintain the same standard of living between 2010 and 2015 , what percentage change in nominal income would be needed? explain.

Answer 1

The cost of a market basket is determined by multiplying quantities and prices of goods for each year. Price indices are calculated using the base year's market basket cost, and the percentage change in nominal income needed to maintain standard of living equates to the percentage change in the basket's cost. Standard of living adjustments must account for changes in consumption.

Step-by-step explanation:

Calculating the Cost of a Market Basket

The cost of a market basket in any given year is calculated by summing the products of the quantities of goods and their respective prices in that year. Unfortunately, the data table with quantities and prices for coffee beans and cassava for 2010 and 2015 is missing from the question. Typically, the cost would be calculated as follows:

• Cost in 2010 = (Quantity of coffee beans in 2010 * Price per unit of coffee in 2010) + (Quantity of cassava in 2010 * Price per unit of cassava in 2010)
• Cost in 2015 = (Quantity of coffee beans in 2015 * Price per unit of coffee in 2015) + (Quantity of cassava in 2015 * Price per unit of cassava in 2015)

Calculating Price Indices

To calculate the price indices using 2010 as the base year, divide the market basket cost of each year by the market basket cost in the base year (2010) and multiply by 100.

• Price Index for 2010 = (Cost in 2010 / Cost in 2010) * 100
• Price Index for 2015 = (Cost in 2015 / Cost in 2010) * 100

Percentage Change in Nominal Income

The percentage change in nominal income needed to maintain the same standard of living would be equal to the percentage change in the price index. If the price index goes up by a certain percentage, the nominal income needs to increase by the same percentage to maintain purchasing power.

Understanding Standard of Living and Inflation

A 25% increase in the cost of a fixed basket of goods matched by a 25% increase in salary doesn't necessarily mean the standard of living has held constant due to issues such as substitution bias and quality/new goods bias. Cost of living adjustments should consider how consumption changes and its impact on utility and satisfaction levels.