In: Economics
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.)
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