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The Index Number ProblemConstruction Theorems$
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Sydney Afriat

Print publication date: 2014

Print ISBN-13: 9780199670581

Published to Oxford Scholarship Online: April 2014

DOI: 10.1093/acprof:oso/9780199670581.001.0001

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The Power Algorithm

The Power Algorithm

Chapter:
(p.16) II The Power Algorithm
Source:
The Index Number Problem
Author(s):

S. N. Afriat

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199670581.003.0003

This chapter discusses the power algorithm central to the proposed method for solving the Index Number Problem. It explains the construction of a fitting constant returns utility as provided by the Conical Utility Construction Theorem (CUCT), comparable with the ordinary UCT (or ‘Afriat's Theorem’) except that the utility has to be constant returns; and what a price index should have to do with such a utility. It shows that with the New Formula, price levels enter into the construction of a hypothetical underlying utility which fits the given demand data and represents all these indices together as true.

Keywords:   power test, Conical Utility Construction Theorem, Afriat's Theorem, price index, price levels

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