Question 1

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers.The consumer price index

Accepted Answer

The consumer price index may not accurately reflect the price decrease due to substitution bias. The index uses a fixed basket of goods and services, and if the price of one item (in this case, personal computers) falls significantly, consumers tend to substitute this item for others that are relatively more expensive in the fixed basket. As a result, the index may overestimate the actual inflation rate and understate the price decrease.

Question 2

The introduction of a new good

Accepted Answer

The introduction of a new good increases the options available to consumers, which often leads to a decrease in the cost of maintaining the same level of economic well-being. This is because consumers can now choose from a wider variety of goods, which may be cheaper or better suited to their needs. An increase in consumer surplus can lead to an increase in overall economic well-being.

Question 3

Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living?

Accepted Answer

Unmeasured price change is not a widely acknowledged problem with using the CPI as a measure of the cost of living. In fact, it is one of the main factors that the CPI attempts to capture by tracking the prices of a fixed basket of goods and services. The other three options, substitution bias, introduction of new goods, and unmeasured quality change, are all recognized issues with the CPI.

Question 4

Because the CPI is based on a fixed basket of goods,the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living.This is so because

Accepted Answer

The introduction of new goods provides consumers with more choices, potentially allowing them to maintain their standard of living at a lower cost, which the fixed basket of the CPI does not account for, leading to an overestimation of the cost of living.

Question 5

The three problems with using the consumer price index as a measure of the cost of living are

Accepted Answer

The three problems with using the consumer price index as a measure of the cost of living are widely acknowledged but difficult to solve. These problems include the substitution bias, the introduction of new goods, and changes in quality. These factors make it difficult to accurately reflect the true cost of living using just the CPI.

Question 6

Samantha goes to the grocery store to make her monthly purchase of ginger ale.As she enters the soft drink section,she notices that the price of ginger ale has increased 15 percent,so she decides to buy some peppermint tea instead.To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

This situation is most relevant to substitution bias as it involves the consumer substituting one good (ginger ale) for another (peppermint tea) due to a change in price. Substitution bias occurs when the CPI does not account for the fact that consumers often substitute cheaper goods for more expensive ones, leading to an overestimation of inflation.

Question 7

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Accepted Answer

The Consumer Price Index (CPI) does not always effectively account for the introduction of new goods. When new products enter the market, they can offer more value or different options to consumers, which the CPI might not immediately or adequately reflect, thus not fully capturing changes in the cost of living or consumer preferences.

Question 8

By not taking into account the possibility of consumer substitution,the CPI

Accepted Answer

The CPI often overstates the cost of living because it doesn't account for consumers switching to cheaper alternatives when prices rise, which can lead to an overestimation of the actual increase in the cost of living.

Question 9

Suppose the price for one gallon of gasoline rises from $3.50 to $4.00 and the price of one gallon of milk rises from $3.00 to $3.20.If the CPI rises from 120 to 132,then people likely will buy

Accepted Answer

The answer of Suppose the price for one gallon of...

Question 10

The consumer price index is

Accepted Answer

The consumer price index (CPI) is a useful measure of the cost of living because it tracks changes in the prices of a representative basket of goods and services consumed by households. However, it is not a perfect measure because it may not reflect the individual experiences of all consumers, may not capture changes in quality, and may not take into account substitution effects. Therefore, choice C is the best option, "a useful measure but not a perfect measure of the cost of living."

Question 11

Assume that consumers consider rice and potatoes to be substitutes,so that when the price of rice rises,consumers purchase less rice and more potatoes.When the CPI is computed following the increase in the price of rice,it takes into account

Accepted Answer

The Consumer Price Index (CPI) primarily measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It does not directly account for changes in consumption patterns, such as the substitution effect between rice and potatoes.

Question 12

The substitution bias in the consumer price index refers to the

Accepted Answer

The substitution bias in the consumer price index refers to the phenomenon where consumers tend to replace goods and services in their shopping basket with other similar goods and services that have become relatively less costly. This behavior of consumers leads to the inflation rate calculated by CPI to be overstated because the CPI ignores the fact that consumers are substituting towards goods that are becoming cheaper. Thus, the best answer is option C. The other options are incorrect because the CPI does not directly account for substitution towards new goods or high-quality products. Similarly, option D is incorrect because the substitution bias does not relate to the substitution of new prices for old prices in the CPI basket.

Question 13

Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years.To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

This situation is most relevant to substitution bias because if prices of dairy products have risen less than prices in general, consumers may substitute away from other goods whose prices have risen more. The CPI may not fully capture this substitution effect, leading to an overestimation of the true inflation rate.

Question 14

Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50.If the CPI rises from 150 to 177,then people likely will buy

Accepted Answer

An increase in the CPI indicates a general increase in the price level of goods and services. If the price of ice cream and coffee both rise, people are likely to buy less of both items, leading to a decrease in demand as the cost to purchase these items becomes relatively more expensive. So, people will likely buy less ice cream and less coffee.

Question 15

When the relative price of a good increases,consumers respond by buying

Accepted Answer

When the relative price of a good increases, consumers tend to buy a smaller quantity of that good due to its higher price. Additionally, they would look for substitutes for that good which are relatively cheaper, leading to a larger quantity of substitutes being bought. Therefore, option C is the correct choice.

Question 16

One problem with the consumer price index stems from the fact that,over time,consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive.This problem is called

Accepted Answer

This problem is known as substitution bias, as it arises due to consumers substituting relatively cheaper goods for relatively more expensive ones over time, which isn't reflected in the fixed basket of goods used for calculating the CPI.

Question 17

When the relative price of a good decreases,consumers respond by buying

Accepted Answer

When the relative price of a good decreases, it becomes relatively cheaper compared to its substitutes. This leads to an increase in the quantity demanded of the good and a decrease in the quantity demanded of its substitutes. Therefore, consumers respond by buying a larger quantity of that good and a smaller quantity of substitutes for that good.

Question 18

When new goods are introduced,consumers have more variety from which to choose.As a result,each dollar is worth

Accepted Answer

When new goods are introduced, consumers have more variety from which to choose. This means that each dollar is worth more, as it can be used to purchase a wider range of goods. As a result, the cost of living decreases.

Question 19

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60.If the CPI rises from 150 to 195,then people likely will buy

Accepted Answer

The answer of Suppose the price of a quart of...

Question 20

Suppose the price of a six-pack of cola rises from $3 to $3.75 and the price of a pack of mints rises from $1.25 to $1.75.If the CPI rises from 140 to 182,then people likely will buy

Accepted Answer

The CPI (Consumer Price Index) is a measure of the average change in prices over time for a basket of goods and services. In this case, the CPI has increased from 140 to 182, which means that the overall price level has increased by 29.29%. The price of a six-pack of cola has increased by 25%, and the price of a pack of mints has increased by 40%. This means that the price of mints has increased more than the price of cola, so people are likely to buy more cola and fewer mints.

Quiz 11: Measuring the Cost of Living: The Consumer Price Index