Remember that the Laspeyres price index uses the old quantities for the weights.In 1991, good x cost $5 and good y cost $1.The current price of good x is $7 and the current price of good y is $6.In 1991 the consumption bundle was (x, y)= (2, 4).The current consumption bundle is (x, y)= (5, 3).The Laspeyres index of current prices relative to 1991 prices is closest to which of the following numbers?
A)3.79
B)2.71
C)0.26
D)1.89
E)1.26

Question

Quizplus · Accepted Answer

To calculate the Laspeyres price index, we use the old quantities as weights. Therefore, the formula for the Laspeyres price index is:

Laspeyres price index = (total cost at current prices using old quantities as weights) / (total cost at base year prices using old quantities as weights)

For good x in the current period, the total cost using old quantities as weights is:

($7 (current price)) x (5 (quantity in 1991)) = $35

For good y in the current period, the total cost using old quantities as weights is:

($6 (current price)) x (4 (quantity in 1991)) = $24

So the total cost at current prices using old quantities as weights is:

$35 + $24 = $59

For the base year prices, the total cost using old quantities as weights is:

($5 (base price)) x (5 (quantity in 1991)) = $25

($1 (base price)) x (4 (quantity in 1991)) = $4

So the total cost at base year prices using old quantities as weights is:

$25 + $4 = $29

Therefore, the Laspeyres price index of current prices relative to 1991 prices is:

Laspeyres price index = $59 / $29 = 2.03 (rounded to two decimal places)

The closest answer choice is B) 2.71.

Remember That the Laspeyres Price Index Uses the Old Quantities