On the planet Homogenia, every consumer who has ever lived consumes only two goods, x and y, and has the utility function U (x, y) = xy. The currency in Homogenia is the fragel. In this country in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capita income was 96 fragels. In 2000, the price of good 1 was 4 fragels and the price of good 2 was 5 fragels. The Laspeyres price index for the price level in 2000 relative to the price level in 1900 is

Question

Quizplus · Accepted Answer

The Laspeyres price index is calculated using the base year quantities and current year prices. In 1900, the consumer could buy 48 units of x and 24 units of y with 96 fragels. In 2000, the cost of these quantities is (48*4 + 24*5) = 312 fragels. The index is 312/96 = 3.25.

On the Planet Homogenia, Every Consumer Who Has Ever Lived