Suppose that dairy products have risen in price less than prices in general over the past several years. Which of the following problems in the construction of the CPI is this price increase most relevant to?

Question

Quizplus · Accepted Answer

This price increase is most relevant to substitution bias because if dairy products have risen in price less than prices in general, it means consumers are more likely to substitute other goods for dairy products. The CPI assumes that consumers always buy the same basket of goods and does not account for the possibility of substitution, leading to an overestimation of the cost of living.

Suppose That Dairy Products Have Risen in Price Less Than