Abstract
IN THIS PAPER we show that application of the traditional theory of the true cost of living index to Lancaster's new approach to consumer theory (cf. [6 and 7]), i.e., to shadow prices of characteristics rather than to ordinary prices of goods, opens a possibility for a convenient treatment of quality changes and of the introduction of new goods. Section 2 is a statement of the relevant properties of Lancaster's model. In Section 3 this model is used to derive a cost of living index, which is not only price compensating but also quality compensating. However, the Laspeyres index which corresponds to this true index and which in principle might be observable, is not always an upper bound on this true index. In this section the relationship to the hedonic price index is also noted. Section 4 contains some concluding remarks.2
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