You Using a Laspeyres (Fixed-Weight )Price Index to Compare Price

question 108

Multiple Choice

You using a Laspeyres (fixed-weight ) price index to compare price changes over time, and the index is based on consumption bundles from 2005 when energy costs were lower and housing costs were higher. Your results are likely to:

• A) Overstate changes in the cost of living because the weight assigned to energy is too small.
• B) Overstate changes in the cost of living because the weight assigned to energy is too large.
• C) Understate changes in the cost of living because the weight assigned to housing is too small.
• D) Understate changes in the cost of living because the weigh assigned to housing is too large.

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Definitions:

Profit

Profit denotes the financial gain achieved when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Capital Goods

Long-lasting goods acquired or created by businesses to produce other goods or services, including machinery, buildings, and equipment.

Consumer Goods

Products that are purchased for consumption by the average consumer, including durable goods, non-durable goods, and services.

Production

The process of creating goods and services, involving the transformation of inputs, like labor and raw materials, into outputs that satisfy consumer demand.