Consider that a consumer likes chicken and beef equally well and in the base year consumes equal amounts of each.If the price of chicken rises sharply next year,she will eat beef almost exclusively.The official CPI,which uses the base year basket as a measure the cost of living,will
A)be biased upward.
B)be biased downward.
C)underestimate the true cost of living.
D)reflect the true changes in the cost of living.

Question

Quizplus · Accepted Answer

The official CPI will be biased upward because it does not account for the substitution effect, where consumers switch to cheaper alternatives when prices change. It assumes the consumer continues to buy the same basket of goods as in the base year, leading to an overestimation of the cost of living.

Consider That a Consumer Likes Chicken and Beef Equally Well