Asked by CHELSEY MYERS on Jun 11, 2024
Verified
On the planet Hyperion, every consumer who has ever lived has a utility function U(x, y) minx, 2y.The currency of Hyperion is the doggerel.In 1850 the price of x was 1 doggerel per unit and the price of y was 2 doggerels per unit.In 2000 the price of x was 11 doggerels per unit and the price of y was 4 doggerels per unit.The Paasche price index of prices in 2000 relative to prices in 1850 is
A) 6.50.
B) 5.
C) 2.75
D) 3.75.
E) It is not possible to determine the Paasche price index without further information.
Utility Function
A mathematical representation of how consumers rank different bundles or combinations of goods and services according to the level of satisfaction or utility those combinations provide.
Paasche Price Index
An economic measure that calculates the change in the cost of acquiring a given basket of goods and services in the current period compared to a base period, using the current period quantities as weights.
Doggerel
A term used to describe poetry that is irregular in rhythm, rhyme, or is of a trivial or low quality.
- Master the techniques of calculating and interpreting Laspeyres and Paasche price indices.
Verified Answer
AG
Ahmed GaberJun 11, 2024
Final Answer :
A
Explanation :
The Paasche price index uses current year quantities as weights, so we find the total current year expenditure and divide by the total base year expenditure. The current year expenditure is U(11,4) = 44 for every consumer, and there are F1F1F110minx, 2yF1F1F1 consumers, so the total current year expenditure is F1F1F110minx, 2yF1F1F1* U(11,4) = F1F1F110minx, 2yF1F1F1* 44. The base year expenditure is U(1,2) = 2 for every consumer, and there are F1F1F110minx, 2yF1F1F1 consumers, so the total base year expenditure is F1F1F110minx, 2yF1F1F1* 2. Dividing, we get an index of F1F1F110minx, 2yF1F1F1* 44/F1F1F110minx, 2yF1F1F1* 2 = 6.5, so the answer is (A).
Learning Objectives
- Master the techniques of calculating and interpreting Laspeyres and Paasche price indices.