Question

Suppose the average consumer divides up his expenditure between bread, meat, milk and cigarettes in the ratio 4:3:2:1. During the course of a year, the price of bread falls by 10% while that of meat rises by 20% and those of milk and cigarettes both increase by 10%. What is the increase in the price level during the year?

Answer 1

Base expenditures:

$4U+3U+2U+1U=10$  Units

New expenditures:

$4*0.9U+3*1.2U+2*1.1U+1*1.1U=10.5U$

Change in price levels:

$(10.5U-10U)/10U=5$ %