Cost-of-living indexes, Microeconomics

COST-OF-LIVING INDEXES 

* The CPI is computed each year as the ratio of cost of a typical group of consumer goods and services today in comparison to the cost during a base period.

* Example

- Two sisters, Raheela and Sarah, have same preferences.

- Sarah began college in the year 1987 with a $500 discretionary budget. 

- In the year 1997, Raheela started college and her parents promised her a budget which was equivalent in purchasing power.

1403_cost of living index.png

• Sarah' Expenditure

  • $500=100 lbs of food x $2.00/lb +15 books x $20/book
  • Raheela' Expenditure having Equal Utility
  • $1,260=300 lbs of food x $2.20/lb +6 books x $100/book
  • The cost of living adjustment for Raheela is $760.
  • The cost of living index is $1,260/$500 = 2.52 or 252.
  • This shows 152 percent increase in cost of living.

566_cost of living index1.png

* The cost of living index represents cost of attaining a given level of utility at current prices relative to cost of attaining same utility at base prices.

* To do this on an economy basis would entail large amounts of information.

* Price indexes, such as the CPI, use a fixed consumption group in the base period. Known as Laspeyres price index. 

Posted Date: 10/10/2012 6:45:24 AM | Location : United States







Related Discussions:- Cost-of-living indexes, Assignment Help, Ask Question on Cost-of-living indexes, Get Answer, Expert's Help, Cost-of-living indexes Discussions

Write discussion on Cost-of-living indexes
Your posts are moderated
Related Questions
Question 1: a. What is the supposed rationale for subsidising higher education in various developing countries? b. Do you think there is a legitimate rationale to the abov

What are the "three basic economic questions" that economists often address when examining how much economic output is formed? The three basic questions are: a) what is prod

The Concept of Money: Money or paper currency serves three functions in any case: it is the medium of exchange, a store of value and the unit of account. Before paper money was

RATIONAL EXPECTATIONS AND ECONOMIC THEORY : We assumed above that the role of economic theory is not to provide quantitative predictions about the future. Suppose we assume ins

Money market, labour market, goods market

Show that a pulsed spherical wave has a complex wavefunction of the form U(r,t) = (1/r)a(t-r/c) where a(t) is an arbitrary function. An ultrashort optical pulse has a complex wavef


Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Consumer Preferences Indifference curves represent all the combinations of market baskets which provide the same level of contentment to the person. Consumer Preferences

STRUCTURE OF NATIONAL INCOME: The structure or composition of national income of an economy explains the relative significance of the different producing sectors in an economy