Suppose that between 1960 and 1985, the price of all goods exactly doubled while every consumer’s income tripled.
(a) Would the Laspeyres price index for 1985, with base year 1960 be less than 2, greater than 2, or exactly equal to 2? ______. What about the Paasche price index? ______.
(b) If bananas are a normal good, will total banana consumption increase?
Yes. If everybody has homothetic preferences, can you determine by what percentage total banana consumption must have increased?
Explain.