You using a Laspeyres (fixed-weight) price index to compare price changes over time, and the index is based on consumption bundles from 2005 when energy costs were lower and housing costs were higher. Your results are likely to:
A) overstate changes in the cost of living because the weight assigned to energy is too small.
B) overstate changes in the cost of living because the weight assigned to energy is too large.
C) understate changes in the cost of living because the weight assigned to housing is too small.
D) understate changes in the cost of living because the weigh assigned to housing is too large.

Question

Quizplus · Accepted Answer

Since the Laspeyres price index is based on consumption bundles from 2005, it assigns a higher weight to housing costs and a lower weight to energy costs. Over time, energy costs have increased significantly while housing costs have not increased at the same rate. Therefore, the fixed-weight index would overstate changes in the cost of living because the weight assigned to energy is too large.

You Using a Laspeyres (Fixed-Weight) Price Index to Compare Price