Weighting goods by expenditure shares in CPI

Steps:

• Identify that CPI measures average price changes for a basket of goods representing typical household spending.
• Recognize that goods with higher spending shares (weights) influence the index more to reflect their economic importance.
• Calculate the index as a weighted average of price relatives, using base-period expenditure proportions.
• Aggregate these weighted changes to form the overall CPI, ensuring representativeness.

Why B is correct:

• CPI construction involves averaging price fluctuations over a year for each item in the basket, then weighting by spending shares to account for varying household expenditures, as per standard index formulas like Laspeyres.

Why the others are wrong:

• A: Deducting goods would exclude them, ignoring their role in spending patterns.
• C: "Taking average" is vague and incomplete, failing to specify weighting or fluctuations.
• D: Price elasticity measures demand responsiveness, not spending proportions used in CPI weights.

Final answer: B