How many statements are false? Statement 1: Adjusting for the quality of the products in a...

How many statements are false?

Statement 1: Adjusting for the quality of the products in a basket used for a price index is called hedonic pricing.

Statement 2: Using the Laspeyres index has three biases, namely, substitution, quality, and economic biases.

Statement 3: The Fischer index is the geometric mean of the Laspeyres index and the Paasche index.

Solutions

Expert Solution

Statement 1	TRUE	hedonic pricing is the process of adjusting the price of commodity or product based on its qualitative aspects, in addition to the environmental factors affecting the price. hedonic regression is used to control the effect of changes in product quality.
Statement 2	TRUE	economic bias- given the price changes of the constituents, consumers adjust the quantity consumed which is not accounted for in Laspeyres index. They also change the quality of products consumed if the prices increase. This substitution of quality and quantity in the basket of goods included in the index is not accounted for in Laspeyres index. Hence, it tends to overstate the impact of inflation. The index has other limitations as well, such as- choice of base year, choice of weights, changs in the basket of goods as so on.
Statement 3	TRUE	Fischer index is cacluated by taking the geometric mean of the 2 indices to remove the inflation estimate biases (+ve in Lasperes index and -ve in Paasche index).

jeff jeffy answered 1 year ago

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