In 2000, you could buy a Cadillac DTS for $45,000. In 2008, the Cadillac DTS sold for $53,000. While both models include anti- lock brakes and airbags (along with other similar features), the 2008 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create
A) an upward bias in the CPI as a result of commodity substitution bias.
B) a downward bias in the CPI as a result of new goods bias.
C) an upward bias in the CPI as a result of quality change bias.
D) a downward bias in the inflation rate.

Question

Quizplus · Accepted Answer

The inclusion of the newer model of Cadillac DTS, which includes new features such as satellite radio and improved gas mileage, would result in an upward bias in the CPI due to quality change bias. This bias occurs because the newer model provides increased value for its price compared to the older model, even though both models are in the same product category.

In 2000, You Could Buy a Cadillac DTS for $45,000