Suppose Natasha consumes two goods: good 1 and good 2. Last year, the price of good 1 was $2.00 and the price of good 2 was $5.00. Given these prices, Natasha maximized satisfaction consuming bundle A, as indicated in the figure to the right. However, this year, the price of good 1 has increased to $6.00 and the price of good 2 has changed to $9.60. Given these prices, Natasha would be equally well off at consumption bundle B. Calculate a Laspeyres cost-of-living index for Natasha using 100 as the base for last year. In particular, the Laspeyres index for this year is ☐ (Enter your response rounded to two decimal places.) The Laspeyres index suggests inflation has been percent over the year. (Enter your response rounded to two decimal places.) The Laspeyres cost-of-living index overstates the rate of inflation because it assumes that consumers do not alter their consumption patterns as prices change. Natasha's true cost-of-living increase has been ☐ percent. (Enter your response rounded to two decimal places.) Good 2 Q 100- 90- Q 80- 70- 60- 50- 40- 30- 20 10- U 0- 0 10 20 30 40 50 60 70 80 90 100 Good 1

Suppose Natasha consumes two goods: good 1 and good 2. Last year, the price of good 1 was $2.00 and the price of good 2 was $5.00. Given these prices, Natasha maximized satisfaction consuming bundle A, as indicated in the figure to the right. However, this year, the price of good 1 has increased to $6.00 and the price of good 2 has changed to $9.60. Given these prices, Natasha would be equally well off at consumption bundle B. Calculate a Laspeyres cost-of-living index for Natasha using 100 as the base for last year. In particular, the Laspeyres index for this year is ☐ (Enter your response rounded to two decimal places.) The Laspeyres index suggests inflation has been percent over the year. (Enter your response rounded to two decimal places.) The Laspeyres cost-of-living index overstates the rate of inflation because it assumes that consumers do not alter their consumption patterns as prices change. Natasha's true cost-of-living increase has been ☐ percent. (Enter your response rounded to two decimal places.) Good 2 Q 100- 90- Q 80- 70- 60- 50- 40- 30- 20 10- U 0- 0 10 20 30 40 50 60 70 80 90 100 Good 1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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