In year 1, the price of health care is $1, while the price of other goods is $2. At these prices, you demand 30 units of health care and 35 units of other goods. In year 2, your utility function and your income do not change, but prices do. Health care becomes more expensive at $1.50, while other goods become cheaper at $1.50. At these prices, you demand 20 units of health care. (a) Assuming you spend all your income in year 2, how many units of other goods do you buy? C = 70/1.5 (b) Use this budget constraint to calculate the Laspeyres price index; that is, the amount of money you need to buy the Year 1 bundle in Year 2, divided by the money you paid for it in Year 1.
In year 1, the
In year 2, your utility function and your income do not change, but prices do. Health care becomes more expensive at $1.50, while other goods become cheaper at $1.50. At these prices, you demand 20 units of health care.
(a) Assuming you spend all your income in year 2, how many units of other goods do you buy?
C = 70/1.5
(b) Use this budget constraint to calculate the Laspeyres price index; that is, the amount of money you need to buy the Year 1 bundle in Year 2, divided by the money you paid for it in Year 1.
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