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

Question

Quizplus · Accepted Answer

Substitution bias in the Consumer Price Index (CPI) occurs because the CPI does not account for the fact that consumers may change their purchasing habits when the relative prices of goods change, such as substituting cheaper goods for more expensive ones. This can lead to an overestimation of the cost of living.

Substitution Bias in the CPI Refers to the Fact That