As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Question

Quizplus · Accepted Answer

The situation described in the question is an example of substitution bias. As the price of gasoline increased, consumers substituted it for other goods, causing them to spend relatively less on gasoline and more on those other goods. However, the CPI does not account for this substitution effect, causing the CPI to potentially overestimate the increase in the cost of living.

As the Price of Gasoline Rose During the 1970s, Consumers