Let us reconsider the case of Ronald in Problem 4.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 $1, and his current consumptions of good 1 and good 2 are 25 and 20 respectively, what is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly correct answer.) A)0.67 B)1.50 C)0.25 D)0.50 E)1

Question

Quizplus · Accepted Answer

The Laspeyres price index is calculated as the weighted average of the price changes of the two goods, using the base year quantities as weights. In this case, the price of good 1 has decreased from $3 to $1, while the price of good 2 has remained the same at $1. The weight of good 1 is 5, and the weight of good 2 is 15. Therefore, the Laspeyres price index is:(1/3 * 5) + (1/1 * 15) = 0.67

Let Us Reconsider the Case of Ronald in Problem 4