Suppose the price of gasoline rises and consumers cut back on their use of gasoline relative to other consumer goods. This situation would contribute 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 above is an example of substitution bias. Substitution bias occurs because the consumer price index (CPI) does not take into account changes in consumer behavior, such as consumers switching to cheaper alternatives when the price of a certain good or service increases. In this case, if the price of gasoline increases, consumers may choose to use public transportation or carpool instead, resulting in a decrease in the overall amount spent on gasoline. However, the CPI does not adjust for this change in behavior, which can lead to an overestimation of the inflation rate.

Suppose the Price of Gasoline Rises and Consumers Cut Back