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Economic Research Institute Study paper


Utah State University

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Many times, advances at the frontiers of econometrics take a long time before being put to work solving practical business problems. This is not the case with the recently published generalized Fechner-Thurstone (GFT) direct utility function which enables decision makers to estimate more accurately changes in the true cost of living. The cost-of-living indexes presented here require no statistical estimation and, therefore, can be constructed from available published sources. The indexes are calculated for the U.S. and the Denver metropolitan are and compared with the published CPI-U and CPI-W for both areas. To show the cost savings possible by a firm adjusting employee wage packages by a true cost-of-living index rather than one of the CPIs, the wage adjustments for a prototype manufacturing firm in the Denver area are presented.