Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007. Suppose this data was collected from a particular town,where people have a preference for firm C's laptops.If 2005 is used as the base year,which of the following statements will be true?
A) The unweighted price index for 2007 understates the fall in the prices of laptops.
B) The unweighted price index for 2006 overstates the fall in the prices of laptops.
C) The unweighted price index should only use the data for laptops produced by firms A and B to provide an accurate picture of the change in prices.
D) The unweighted price index will better reflect the change in prices over these years than a weighted price index.

Question

Firms A,B,and C operate in the market for computers.Each firm's product is popular in the market and distinct from what the other firms offer.The following table shows the prices of laptops from 2005 through 2007.  Suppose this data was collected from a particular town,where people have a preference for firm C's laptops.If 2005 is used as the base year,which of the following statements will be true?
A) The unweighted price index for 2007 understates the fall in the prices of laptops. 
B) The unweighted price index for 2006 overstates the fall in the prices of laptops. 
C) The unweighted price index should only use the data for laptops produced by firms A and B to provide an accurate picture of the change in prices. 
D) The unweighted price index will better reflect the change in prices over these years than a weighted price index.

Quizplus · Accepted Answer

Firm C's laptops are preferred in the market, so they may have a higher market share and influence the overall market price. Therefore, the unweighted price index may overstate the fall in prices in the year when Firm C's price dropped significantly (i.e., 2006). The unweighted price index may still provide a rough indication of the trend in prices over these years, but a weighted price index may provide a more accurate picture by taking into account the market share of each firm. Option A is incorrect because the unweighted price index does not account for the different market shares of each firm, which could impact the change in overall market price. Option C is incorrect because excluding Firm C's data may result in an incomplete or biased representation of the market. Option D is unclear and incorrect because it is not specified what type of weighted price index is being compared and how it would affect the measurement of price changes.

Firms A,B,and C Operate in the Market for Computers