Question

Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2 each, green apples cost $1 each, and Abby buys 10 green apples. Assume that year 1 is the base year in which the consumer basket is fixed. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2? Nominal spending in year 1: $___ Nominal spending in year 2: $___ Nominal spending has:___

a)10, 10, stayed the same
b)11 10, stayed the same
c)10, 11, stayed the same
d)9, 10, stayed the same

Answer 1

Abby's nominal spending on apples was $10 in both year 1 and year 2. Although the prices of apples changed between the years, Abby's total expenditure on 10 apples remained consistent.

Step-by-step explanation:

To compute Abby's nominal spending on apples, we need to multiply the quantity of apples purchased by the price of the apples in that year. In year 1, Abby buys 10 red apples at $1 each, which results in a total spending of $10 on apples. In year 2, the price of red apples has increased to $2 each, but Abby decides to buy 10 green apples, now costing $1 each, amounting to a total of $10 on apples again.

Nominal spending in year 1: $10

Nominal spending in year 2: $10

From year 1 to year 2, Abby's nominal spending on apples has: stayed the same.