Suppose there are two good types (Type 1 and Type 2)and suppose the weights for the types are 80% for Type 1 and 20% for Type 2. Suppose the Price Index for Type 1 is 125 and the Price Index for Type 2 is 120. The overall price index is

Question

Quizplus · Accepted Answer

To calculate the overall price index, we need to take a weighted average of the price indices of each type, where the weights are the proportions of each type in the mix.

Overall Price Index = (Weight of Type 1 x Price Index of Type 1) + (Weight of Type 2 x Price Index of Type 2) 
Overall Price Index = (0.8 x 125) + (0.2 x 120) 
Overall Price Index = 124

Therefore, the best choice is (C) with the explanation above.

Suppose There Are Two Good Types (Type 1 and Type