Letting Time 1 be the base period, construct Laspeyres and Paasche price indices for this economy. Please answer all parts.

3. Here is data from a simple economy where only two goods are produced: Time 1 Time 2 Price Bread $3/loaf $4 Quantity Bread 10 loaves 12 Price Yachts $10 $5 Quantity of Yachts 2 1 a. Letting Time 1 be the base period, construct Laspeyres and Paasche price indices for this economy. b. Construct two measures of the change in real output and explain why they give different answers to the question of whether it is bigger or smaller in period 2. C. In period 2, the price relative of bread is 4/3, while the price relative of yachts is 5/10. Show that the Laspeyres index in period 2 that you found in part a. is a weighted average of the two price relatives, where the weights on each are given by the share of spending on each good in the base period. d. Suppose people bought the time 2 bundle of goods at base period prices. What would the share of spending on each good be? Show that the value of the Paasche index in period 2 is a weighted average of the two price relatives where the spending shares you just found are the weights