In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags along with other similar features), the 2011 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 2011 Cadillac DTS in the CPI basket would create an upward bias in the CPI as a result of quality change bias. This is because the new technology and features in the 2011 model make it a better product than the 2000 model, and therefore justify the higher price. This would lead to an overestimation of the true inflation rate, as the CPI would be reflecting the increased quality of the product rather than just the increase in price.

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