11-25-2014, 08:40 PM
ECO402 Assignment No 01 Discussion and Solution Last Date 2nd December 2014
Continuous rise in prices of food and non food items from last few years is most important concern for majority people in Pakistan. Higher prices have made people’s lives more difficult. They are unable to afford the same standard of living which they were getting in past. To calculate and analyze rise in cost of living, we have taken the basket of two persons, Ali and Atif belonging to middle class in different periods. Selected Basket contains food and non food items. Both persons have same preferences and are getting same satisfaction. Ali is doing spending on food and non food items in year 2011 and Atif is spending his income on these items in year 2013. Atif has to bear
more cost as compared to Ali if he gets the same satisfaction/standard of living which Ali
is getting in year 2011. Items, quantities and their prices in 2011 and 2013 are given
below.
Price (Rs.) Units purchased
Items 2011 2013 Ali Atif
Food Items 80 95 10 28
Non-Food
Items
55 130 32 12
Using the given data, you are required to:
a) Calculate cost of basket/expenditures of Ali in year 2011.
b) Calculate cost of basket/expenditures of Atif in year 2013.
c) How much adjustment in ideal cost of living is required by Atif to attain the same
level of utility which Ali is getting?
d) Calculate ideal cost of living index.
e) Graphically compare the costs of basket/expenditures borne by Ali and Atif to
attain same utility.
Note: Write down all relevant steps involved in calculation.
Marks: (2.5+2.5+3+4+3