Question

Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from $3.00 to $3.20 . If the CPI rises from 120 to 132, then people likely will buy:_________.

a. more gasoline and more milk.
b. more gasoline and fewer milk.
c. less gasoline and more milk.
d. less gasoline and fewer milk.

Answer 1

c. less gasoline and more milk.

Step-by-step explanation:

The increase in price of gasoline = $3.50 to $4

The increase in price of milk = $3 to $3.20

The increase in CPI = 120 to 132

Current price as per CPI of Gasoline should be = (132 /120) * $3.5 = ($3.85)

The price of milk considering the CPI = (132/120) * $3 = 1.1*3 = $3.3

Since the actual price of milk is lower than the price of $3.3. thus more of milk will be demanded. So option c. “less gasoline and more milk” is correct.