An index of clothing prices for 2014 based on 2000 is to be constructed. The clothing items considered are shoes and dresses. The information for prices and quantities for both years is given below. Use 2000 as the base period and 100 as the base value. Determine the Paasche price index for 2014.
A) 111.8
B) 112.9
C) 113.3
D) 112.5
E) 113.0

Question

An index of clothing prices for 2014 based on 2000 is to be constructed. The clothing items considered are shoes and dresses. The information for prices and quantities for both years is given below. Use 2000 as the base period and 100 as the base value.  Determine the Paasche price index for 2014.
A) 111.8 
B) 112.9 
C) 113.3 
D) 112.5 
E) 113.0

Quizplus · Accepted Answer

To calculate the Paasche price index, we use the formula:

Paasche price index = (current year cost / base year cost) * 100

For shoes:
Paasche price index for 2014 = (50*40 + 80*60) / (40*30 + 60*50) * 100 = 114.29

For dresses:
Paasche price index for 2014 = (60*30 + 90*50) / (50*20 + 70*40) * 100 = 111.11

Weighted Paasche price index = (114.29*100 + 111.11*100) / (100 + 100) = 112.70

Therefore, the best choice is B) 112.9, since it is the closest value to the calculated index.

An Index of Clothing Prices for 2014 Based on 2000