Suppose the price of banana rises over time and consumers respond by buying fewer bananas. This situation contributes to which bias in the consumer price index?
A) Substitution bias.
B) Transportation bias.
C) Quality bias.
D) Indexing bias.

Question

Quizplus · Accepted Answer

The situation described corresponds to substitution bias, which occurs when consumers shift their purchases from relatively more expensive goods to cheaper ones in response to price increases. As a result, the CPI would overestimate the increase in the cost of living because it assumes a constant basket of goods and services.

Suppose the Price of Banana Rises Over Time and Consumers