As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to
A) overstate the impact of higher prices on consumers.
B) consistently underestimate the true inflation rate.
C) omit the benefits of product quality improvements.
D) have larger fluctuations than other price indexes.

Question

Quizplus · Accepted Answer

The substitution bias problem causes the CPI to overstate the impact of higher prices on consumers, as it does not take into account the shift in consumer behavior towards cheaper substitutes. This can lead to an overestimate of inflation.

As Inflation Drives Up Prices, People Attempt to Find Substitutes