Arnold spends all his money on sunscreen and lemonade. In June he bought 5 ounces of sunscreen at $1 per ounce and 20 gallons of lemonade at $1.30 per gallon. In July he bought 7 ounces of sunscreen at $1.10 per ounce and 18 gallons of lemonade at $1.70 per gallon. In August he bought 3 ounces of sunscreen at $1.40 per ounce and 23 gallons of lemonade at $1.80 per gallon.
a. Create a Laspeyres price index using June as the base period (that is, use Arnold's consumption bundle for June to create the fixed weights). How did his cost of living change according to this measure?
b. Repeat part (a) first using July as the base period and then using August as the base period.
c. Do the Laspeyres price indexes you obtained in parts (a) and (b) imply the same percentage increases in Arnold's cost of living over time? If not, by how much do they differ?