If there is a 5 percent increase in the CPI, then there will most likely be
A)a more than 5 percent rise in the cost of living because of the introduction of new goods.
B)a more than 5 percent rise in the cost of living because consumers substitute away from goods whose relative prices rise towards other goods.
C)a 5 percent rise in the cost of living.
D)a less than 5 percent rise in the cost of living because of falling quality of goods over time.
E)a less than 5 percent rise in the cost of living because consumers substitute away from goods whose relative prices rise towards other goods.

Question

Quizplus · Accepted Answer

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. When the CPI increases by 5 percent, it suggests that on average, the cost of this basket has increased by this percentage. However, the CPI may not fully account for changes in consumer behavior, such as substitution effects. Consumers often substitute away from goods whose prices have increased towards cheaper alternatives. This behavior can lead to the actual cost of living increase being less than the CPI suggests, as consumers adjust their spending to mitigate the impact of price increases. Therefore, the correct answer is that there would be a less than 5 percent rise in the cost of living because consumers substitute away from goods whose relative prices rise towards other goods.

If There Is a 5 Percent Increase in the CPI