As the price of petrol rose during the 1970s, consumers cut back on their use of petrol relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Question

Quizplus · Accepted Answer

The situation described in the question is an example of substitution bias, which occurs when consumers switch to cheaper alternatives as the prices of certain goods rise. In this case, as the price of petrol rose, consumers likely reduced their consumption of petrol and substituted it with other goods, leading to a lower weight for petrol in the CPI and potentially understating the overall inflation rate.

As the Price of Petrol Rose During the 1970s, Consumers