The key reason that the Laspeyres price index tends to overstate the impact of price changes on consumers is that it:
A) only accounts for price increases and ignore price decreases.
B) measures prices two periods after the actual price changes occurred.
C) ignores the possibility that consumers alter their consumption as prices change.
D) All of the above are correct.
E) none of the above

Question

Quizplus · Accepted Answer

The Laspeyres price index only considers a fixed basket of goods and ignores the possibility that consumers may change their consumption patterns in response to price changes. This means that it may overstate the true impact of price changes on consumers. Option A is incorrect because the Laspeyres index does consider both price increases and decreases. Option B is incorrect because the Laspeyres index typically uses current period prices to calculate the index, not prices from two periods after the actual price changes occurred.

The Key Reason That the Laspeyres Price Index Tends to Overstate