Consider the case of Ronald. Let the prices and consumptions in the base year be as in situation D, where p₁ = 3, p₂ = 1, x₁ = 5, and x₂ = 15. If in the current year, the price of good 1 is $1 and the price of good 2 is $2, and Ronald's current consumptions of good 1 and good 2 are 25 and 25 respectively, what is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly correct answer.)

Question

Quizplus · Accepted Answer

The Laspeyres price index is calculated as the ratio of the cost of purchasing the base year basket at current prices to the cost of purchasing the base year basket at base year prices. The base year cost is (3*5 + 1*15) = 30. The current year cost is (1*5 + 2*15) = 35. The index is 35/30 = 1.17.

Consider the Case of Ronald