Economists agree that the structure of the Consumer Price Index has some problems that limit its usefulness as a reliable measure of inflation. What is one of these drawbacks?
A) It is based on the faulty assumption that each consumer buys only one unit of each item.
B) It is based on the faulty assumption that consumption choices are not influenced by income levels.
C) It ignores changes in consumption patterns brought about by changes in the relative prices of consumer goods.
D) It is based on a market basket of mail-order items and does not include the goods that consumers typically purchase.

Question

Quizplus · Accepted Answer

The Consumer Price Index assumes that consumers do not change their consumption choices based on changes in relative prices of goods. However, in reality, consumers often substitute certain goods for others when prices change, which can affect the overall inflation rate. This is a major drawback of the CPI and limits its usefulness as a reliable measure of inflation.

Economists Agree That the Structure of the Consumer Price Index