Question

Suppose prices in period one (base period) are (1, 2) and the consumer chooses (5.00, 6.00). In period two (current period), prices are (3.00, 4.00) and the consumer updates his optimal consumption bundle and chooses (2, 2). The Paasche price index of prices in period two relative to period one is _____ . (Round to two decimal places if necessary.)

Answer 1

Ans: The Paasche price index of prices in period two relative to period one is 233.33

Explanation:

Paasche price index =

Where ,

P1 = current year price

P0 = base year price

Q1 = current year quantity

= [ ( $3 * 2 ) + ( $4 * 2 ) / ( $1 * 2 ) + ( $2 * 2) ] * 100

= [( $6 + $8 ) / ( $2 + $4) ] * 100

= ($14 / $6 ) * 100

= 2.3333 * 100

= 233.33