Substitution bias in the CPI refers to the fact that the CPI
A) takes no account of the substitution of goods by consumers when relative prices change.
B) takes into account the substitution of goods by consumers when relative prices change.
C) substitutes relative prices for absolute prices of goods.
D) substitutes quality changes whenever they occur without taking account of the cost of the quality changes.

Question

Quizplus · Accepted Answer

Substitution bias in the CPI refers to the fact that the CPI takes no account of the substitution of goods by consumers when relative prices change. This means that the CPI overstates the increase in the cost of living because it assumes that consumers continue to buy the same goods and services regardless of changes in relative prices. In reality, consumers will substitute cheaper goods for more expensive ones when their relative prices change.

Substitution Bias in the CPI Refers to the Fact That