When prices of different goods are increasing by different amounts, the price index that will rise the fastest is:
The correct answer and explanation is:
The price index that will rise the fastest when prices of different goods are increasing by different amounts is the Weighted Price Index.
A Weighted Price Index assigns different weights to the various goods based on their importance or share in the total consumption or expenditure of a typical household. This means that goods which are more commonly consumed or have higher expenditure will have greater influence on the overall price index. As a result, if the prices of these heavily weighted goods increase significantly, the overall price index will show a larger increase compared to other indices that do not give the same level of importance to these goods.
In contrast, simple price indices, such as the unweighted index, treat all goods as equally important, so large increases in the price of a less commonly consumed good may have less impact on the overall index compared to a weighted price index. This makes the weighted price index a more accurate reflection of changes in the cost of living when different goods are increasing in price at different rates.
A key reason why the Weighted Price Index rises faster in this scenario is because it takes into account the real-life consumption patterns of individuals. Goods like food, fuel, and housing often carry higher weights in such indices due to their essential nature and higher consumption rates, so any substantial increase in their prices will have a larger impact on the price index compared to goods with lower weights.
In summary, when prices of different goods are rising by different amounts, the price index that rises the fastest will be the Weighted Price Index because it accounts for the varying importance of each good, thus reflecting the true inflationary pressures on consumers.