13th Edition
Roger A. Arnold
ISBN: 9781337617406




13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Someone says, “The price of good X has risen, so good X is more expensive than it used to be.” In what sense is this statement correct? In what sense is this statement either incorrect or misleading?

To determine

The validity of the given statement.


The given statement is correct, when the increase in the price of good X is due to the increase in the money price of the good. However, the statement is also misleading as the increase in money price may not reflect an increase in the relative price of the good. This can be illustrated with the help of an example. Let us assume that the absolute price of good X is $20 and the absolute price of good Y is $40.

The relative price of good X in terms of good Y can be calculated as follows.

Relative priceX=Absolute PriceXAbsolute PriceY

Relative priceX=2040=0

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