Consider a simple economy producing only three goods beer, pretzels, and tomatoe
ID: 1223914 • Letter: C
Question
Consider a simple economy producing only three goods beer, pretzels, and tomatoes. The price and output data are presented below. Use the date to answer the next two questions.
Product Quantity Price
1990 Beer 100 $0.75 Pretzels 300 $1.25 Tomatoes 200 $2.00 2000 Beer 120 $1.10 Pretzels 280 $2.10 Tomatoes 190 $2.00
13. The base-year-quantity price index in 2000 using 1990 as a base year would be a. 134 b 158 c. 850 d. 152 14. The current-year-quantity price index in 2000 using 1990 as a base year would be a. 134 b 158 c. 850 d. 152
Explanation / Answer
13. Laspeyre’s Price Index is a weighted aggregate of price index. It is also known as base-year-quantity price index as it takes quantities of base year as the weights to calculate price index. Laspeyre’s Price Index is calculated as follows:
P01 = p1q0 x 100
p0q0
P01 = Laspeyre’s Price Index
p1= price of a product of the current year
p0= price of a product of the base year
q0 = quantity of a product of the base year
Products
p1
q0
p1q0
p0
p0q0
Beer
$1.10
100
110
$0.75
75
Pretzels
$2.10
300
630
$1.25
375
Tomatoes
$2.00
200
400
$2.00
400
p1q0 =1,140
p0q0 =850
P01 = p1q0 x 100
p0q0
P01 = (1,140 /850) x 100
P01= 134
Thus, the answer is (a) 134. Laspeyre’s Price Index of 134 means that a basket that consumers bought in the base period (1990) for $100 would now cost $134 in the current period (2000).
14. Paasche’s Price Index is also a weighted aggregate of price index. It is also known as current-year-quantity price index as it takes quantities of current year as the weights to calculate price index. Paasche’s Price Index is calculated as follows:
P01 = p1q1 x 100
p0q1
P01 = Paasche’s Price Index
p1= price of a product of the current year
p0= price of a product of the base year
q1 = quantity of a product of the current year
Products
p1
q1
p1q1
p0
p0q1
Beer
$1.10
120
132
$0.75
90
Pretzels
$2.10
280
588
$1.25
350
Tomatoes
$2.00
190
380
$2.00
380
p1q1 =1,100
p0q1 =820
P01 = p1q1 x 100
p0q1
P01 = (1,100/820) x 100
P01= 134
Thus, the answer is (a) 134. Paasche’s Price Index of 134 means that a basket that consumers bought in the current period (2000) for $134 would have cost of $100 in the base period (1990).
Products
p1
q0
p1q0
p0
p0q0
Beer
$1.10
100
110
$0.75
75
Pretzels
$2.10
300
630
$1.25
375
Tomatoes
$2.00
200
400
$2.00
400
p1q0 =1,140
p0q0 =850