Question

The thego o y come food t 3.00 and the and by FC FC S e rais come in 1900 31200 and that the roof food P) and clothing Pc) $100 perat frech By 2000, however 100 cooling Index for the pre v iews for Meredith for 2000. Meredith will spend equal d Th i s and they wil metly where M

Answer 1

Year 1990 PE=31 (Price of food) P = $1 (Price of clothing M = $120 (Income) - (1 Budget constraint: F. Pe + c. Pe - M > F + C = 1200 U = FC (utility for). Mus dolor Mup = c/ Muc= doloc 1 Muc=FL at utility meximizing bund, MVE - > > >CEF - ©

Ret eg 6 in ego. F + c = 1200 cec-1210 26 = 1200 (= (1200/1) => 10 = 600] and F = Croth » F = 60 In 1990 Meredith will consume to Foods and bas clothing. U=Fc u=l6w) (60) 10 = 360000 Hence, Meredith utility in 1990 is 360o0o. Laspeysu Index The Lespeyre index represent how much more Meredith bowould have to spend in 200 versus 1990 if she consumed the same amount of food and clothing in 2010 as she did in 1990 That is the Laspryses index (LI) for 2010 is given by LI ln (I')/1. where Il represent the amount Meredith would spend at 2000 I prices consuming the same amount of food and clothing as in 1990

In Yea/ 2000 200 Pc = $4.25 In 2000, bus clothing and boo food would cost to $4850. le (6w) (3) + (6w) (4.25) = $ 4350 . Therefore, the Lalpyres curt of living in dex is: - LI= 100 (44350 A1200) ILI = 362.5 The Laspeyres in dax for zou is 361.5