Substitution bias in computing the CPI tends to make the CPI overstate the true increase in the cost of living.

Question

Quizplus · Accepted Answer

Substitution bias occurs when the CPI does not account for consumers' ability to switch to cheaper alternatives when the price of a specific good or service increases. This can lead to an overstatement of the true increase in the cost of living because it assumes that consumers continue to purchase the same goods and services even when their prices increase, rather than seeking out more affordable options.

Substitution Bias in Computing the CPI Tends to Make the CPI