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A pensioner's income is W-3500, This person consumes two goods, which we will denote by x and y, and has utility function U(x.y)=3x*2y^4 (here ^a
A pensioner's income is W-3500, This person consumes two goods, which we will denote by x and y, and has utility function U(x.y)=3x*2y^4 (here ^a means to the power of a). Prices for these goods are Px-1 and Py-5, respectively. Suppose that prices change to P'x-2 and Py-5.Suppose that the Social Security administration uses a Laspeyres index to adjust income instead of the adjustment that is necessary to maintain the agent's welfare constant before and after the price change. By how much does the Social Security administration overcompensates the agent? (You can calculate Laspayres Index and Ideal index taking a base value of 1 at year 0; the answer to this question is the difference between the indices times 100, read as a %; for instance, if Indices are 1.45 and 1.39, the difference is 0.06, which is 6%). O 11%
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