You are 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. understate changes in the cost of living because the weight assigned to housing is too small. B. overstate changes in the cost of living because the weight assigned to energy is too large. C. overstate changes in the cost of living because the weight assigned to energy is too small. D. understate changes in the cost of living because the weight assigned to housing is too large.

Question

Zaria Franklin

Business

1 January, 08:30

You are 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. understate changes in the cost of living because the weight assigned to housing is too small. B. overstate changes in the cost of living because the weight assigned to energy is too large. C. overstate changes in the cost of living because the weight assigned to energy is too small. D. understate changes in the cost of living because the weight assigned to housing is too large.

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Answers (1)

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Isabell Oconnell · Answer 1

C. overstate changes in the cost of living because the weight assigned to energy is too small

Explanation:

the weight in this index uses less energy efficient houses as the construction cost were higher

and relies more on energy which was cheaper at the time.

Because of this, now the index will overstate the changes in the cost of living.

The weight assigned to energy changed and people shift to more energy efficient houses to save in his energy bill's. The consumers will always shift their consumption to avoid unnecessary spending. In this case, construct more energy efficient houses and sasve on the billing