If there is an increase in the price of apples which causes consumers to purchase fewer kilograms of apples and more kilograms of oranges, the CPI will suffer from
A) Consumer preference bias.
B) Substitution bias.
C) Base year bias.
D) Bias due to unmeasured quality change.
E) Bias due to the introduction of new goods.

Question

Quizplus · Accepted Answer

This is an example of substitution bias, as the CPI does not take into account the fact that consumers may switch to substitute goods when the price of a certain item increases. This can cause the CPI to overstate inflation.

If There Is an Increase in the Price of Apples