The price of leisure A) is the same for everyone. B) depends ...

[burchfield96]

The price of leisure
 
  A) is the same for everyone.
  B) depends on the number of hours worked.
  C) is measured as foregone earnings.
  D) is immeasurable.

Question 2

Suppose the typical consumer only purchases food and clothing, and her utility can be expressed as U=FC. Currently, food costs 5 per unit and clothing costs 2 per unit. Her income is 70. If the price of food increases to 6, compare the resulting Laspeyres price index with a true cost of living index.
 
  What will be an ideal response?

[mbcrismon]

Answer to Question 1

C

Answer to Question 2

Maximizing utility subject to the initial constraint (5F + 2C = 70 ) yields C/F = 5/2 or F = 7 and C = 17.5. The Laspeyres price index calculates the ratio of the income necessary to achieve the original bundle relative to the original income. In this case, (6  7 ) + (2  17.5 )/70 = 1.10. The true cost of living index calculates the ratio of the income necessary to achieve the original level of utility relative to the original income. Utility is held constant when C  F = 17.5  7 = 122.5. The consumer is on the new budget line when C/F = 3. Combining yields F = 6.39 and C = 19.17. At the new prices, this requires an income of 76.68 and a resulting cost of living index of 76.68/70 = 1.095.