10.6 The following table shows the weights in the retail price index and the values of the index itself, for 1990 and 1994. Food Alcohol Housing Fuel Household Clothing Personal Travel Leisure and and items goods tobacco light Weights 1990 205 111 185 50 111 69 39 152 78 1994 187 111 158 45 123 58 37 162 119 Prices 1990 121.0 120.7 163.7 115.9 116.9 115.0 122.7 121.2 117.1 1994 139.5 162.1 156.8 133.9 132.4 116.0 152.4 150.7 145.7

(a) Calculate the Laspeyres price index for 1994, based on 1990 = 100.

(b) Draw a bar chart of the expenditure weights in 1990 and 1994 to show how spending patterns have changed. What major changes have occurred? Do individuals seem to be responding to changes in relative prices?

(c) The pensioner price index is similar to the general index calculated above, except that it excludes housing. What effect does this have on the index? What do you think is the justification for this omission?

(d) If consumers spent, on average, £188 per week in 1990 and £240 per week in 1994, calculate the real change in expenditure on food.

(e) Do consumers appear rational, i.e. do they respond as one would expect to relative price changes? If not, why not?