Which of the following is a deficiency of the regular (or traditional) consumer price index (CPI) as a measure of the cost of living?
A) The CPI fails to make any adjustment for changes in the price of housing.
B) The CPI only measures changes in the prices of food, clothing, and energy.
C) The CPI fails to maintain the quantities of the typical bundle of goods purchased by consumers constant over a lengthy time frame.
D) The CPI does not adjust regularly for the fact that consumers will shift their spending away from goods that become more expensive.

Question

Which of the following is a deficiency of the regular (or traditional) consumer price index  (CPI) as a measure of the cost of living?
A) The CPI fails to make any adjustment for changes in the price of housing.
B) The CPI only measures changes in the prices of food, clothing, and energy.
C) The CPI fails to maintain the quantities of the typical bundle of goods purchased by consumers constant over a lengthy time frame.
D) The CPI does not adjust regularly for the fact that consumers will shift their spending away from goods that become more expensive.

Quizplus · Accepted Answer

The CPI does not account for substitution bias, where consumers change their purchasing habits in response to changes in relative prices, which can lead to an overestimation of the cost of living.

Which of the Following Is a Deficiency of the Regular