Calculating Laspeyres and Paasche Indices

Year Made-up Item #1 Made-Up Item #2

Quantity Price ($/unit) Quantity Price ($/unit)

2021 50 0.50 100 1

2022 45 2 150 1.2

Year	Made-up Item #1	Made-Up Item #2
	Quantity	Price ($/unit)	Quantity	Price ($/unit)
2021	50	0.50	100	1
2022	45	2	150	1.2

a) (3 points) Assume that 2021 is the base year. Use the data in the table above to calculate the rate of inflation using the Laspeyres index.

b) (3 points) Assume that 2021 is the base year. Use the data in the table above to calculate the rate of inflation using the Paasche index.

c) (2 points) For every year that you are employed, I am sure, you would like to receive an upward adjustment in your wages that is at least equal to the rate of inflation. The same is true for seniors receiving pension benefits from the Canadian government that are adjusted to inflation. Assuming that the rate of inflation is calculated in only two ways: (i) changes in the Laspeyres index and changes in the (ii) Paasche index. Which index would you or your retired grandfather, for example, prefer that your employer or the government, respectively, use in indexing your wage or pension benefit? Explain why.