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

Because people have a preference for firm C's laptops, the unweighted price index may overstate the fall in the prices of laptops in 2006 since it does not take into account the popularity of firm C's laptops. This means that the average price of laptops may have gone down, but the decrease in price for firm C's laptops may not be as significant. Therefore, the unweighted price index may not accurately reflect the change in prices for the market as a whole.

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