. "4 Evolving Market Baskets: Adjusting Indexes to Account for Quality Change." At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press, 2002.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
reduction will leave the consumer no worse off. She will be better off in the (new) first period if she can afford some z1′∈C1 that she prefers to z2. Thus h2(z2) − h1(z2) is less than or equal to the equivalent variation, depending on whether such a z1´exists or not.
For our single consumer, the price relative could naturally be computed as either h2(z1)/h1(z1) or h2(z2)/h1(z2). The former is a Laspeyres approach and, as above, relates to the compensating variation. The latter is a Paasche approach and relates to the equivalent variation. In the usual sense, and with all the usual caveats plus the requirement that z1 and z2 be available in both periods, in this simple case these two measures bound the true, preference-dependent, change in the cost of living.