Geoff goes to the grocery store to make his monthly purchase of coffee. As he enters the beverage section, he notices that the price of coffee has been raised by 15 percent, so he decides to buy some tea instead. Which problem in the construction of the CPI is this situation most relevant to?

Question

Quizplus · Accepted Answer

This situation is most relevant to substitution bias in the construction of the CPI. Geoff substituted tea for coffee as the price of coffee increased, but the CPI does not account for consumers' ability to substitute goods when their prices change, leading to an inflation overstatement.

Geoff Goes to the Grocery Store to Make His Monthly