Suppose there are only two goods (Good A and Good B)and the average person buys 4 of Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the Price of Good B is $10, and in the next year the Price of Goods A and B both increase by 5% at the same stores but new business starts to sell B for $9 what is the problem with the CPI way of calculating inflation that is apparent

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Quizplus · Accepted Answer

The Consumer Price Index (CPI) may not account for changes in consumer behavior, such as switching to cheaper alternatives when prices rise. In this scenario, if people start buying Good B from the new store at a lower price, the CPI, which typically uses a fixed basket of goods, might overstate inflation by not reflecting this shift to a more affordable option.

Suppose There Are Only Two Goods (Good a and Good