In the base year the average family spent 25% of its income on Good X, 25% on Good Y, and 50% on Good Z. Over the second year the prices of Goods X and Y were unchanged but the price of Good Z increased by 30%. Which of the following statements is correct?
A) The price index at the end of the second year was 100 + (0+0+30)/3 = 110.
B) The effect on the price index is unknown if we don't know how the average family's consumpion of the three goods changed in the second year.
C) The price index would be less than 100 if the average household responded to the relative price changes by spending all it's income on Goods X and Y and nothing on Good X.
D) Answers (B) and (C )are correct, but answer A is incorrect.
E) None of the above is correct.
