Recall that the Laspeyres price index (P.I.)uses the old bundle as weights and the Paasche price index uses the new bundle as weights.If the prices of all goods double and your income triples,
A)your income increase has exceeded the increase in the Laspeyres P.I.but may not have exceeded the increase in the Paasche P.I.
B)your income increase has exceeded the increase in the Laspeyres P.I.and has also exceeded the increase in the Paasche P.I.
C)your income increase has exceeded the increase in the Paasche P.I.but may not have exceeded the increase in the Laspeyres P.I.
D)you would need to know the old and new consumption bundles to compare your income change with the change in price indexes.
E)None of the above.

Question

Quizplus · Accepted Answer

Since all prices have doubled, both the Laspeyres and Paasche price indexes will show a 100% increase (doubling) in prices. Since your income has tripled (a 200% increase), your income increase has exceeded the increase in both the Laspeyres and Paasche price indexes.

Recall That the Laspeyres Price Index (P