The substitution bias refers to choices consumers make between the categories of goods that form the basis for the CPI calculation.

Question

Quizplus · Accepted Answer

The substitution bias occurs when consumers switch to cheaper alternatives within the same category of goods to offset a price increase, which is not reflected in the CPI calculation. This bias can overstate inflation as it assumes consumers continue to purchase the same goods regardless of price changes.

The Substitution Bias Refers to Choices Consumers Make Between the Categories