Question 1

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

Accepted Answer

The answer of Suppose OPEC succeeds in raising world oil...

Question 2

Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?

Accepted Answer

There is ongoing debate among economists about the severity of the bias in the CPI as a measure of the cost of living and what actions should be taken to address it. While some economists believe that the bias is significant and needs to be addressed, others argue that the current methodology is still the most accurate way to calculate the cost of living. Therefore, there is no clear consensus among economists on the severity of the bias and what to do about it.

Question 3

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers. The consumer price index

Accepted Answer

The consumer price index may underestimate the actual price decrease due to substitution bias, which occurs when consumers switch to cheaper substitutes for goods whose prices have increased. In this scenario, the decrease in personal computer prices could lead to consumers substituting personal computers for other goods that have not experienced a price decrease, causing the CPI to understate the actual decrease in personal computer prices.

Question 4

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar

Accepted Answer

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar decreases because the consumer is receiving less value for the same price. This means that the CPI will underestimate the change in the cost of living if the quality change is not accounted for.

Question 5

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

Accepted Answer

The invention of pocket-sized computers is most relevant to the problem of "introduction of new goods." It is a new good that did not exist before, and it has become very popular in recent years. The CPI needs to account for the introduction of new goods because it shifts the consumer's basket of goods and affects the overall price level.

Question 6

If the quality of a good deteriorates while its price remains the same, then the value of a dollar

Accepted Answer

If the quality of a good deteriorates while its price remains the same, then the purchasing power of a dollar has decreased because the consumer is now receiving less value for their money. This leads to inflation and a rise in the cost of living. Therefore, the value of a dollar falls and the cost of living increases.

Question 7

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

Accepted Answer

When the quality of a good improves while its price remains the same, the value you get for each dollar spent increases, meaning the purchasing power of the dollar increases. If the Consumer Price Index (CPI) does not adjust for this quality improvement, it may suggest that consumers are getting less for their money than they actually are, thus overstating the change in the cost of living.

Question 8

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth

Accepted Answer

The answer of When new goods are introduced, consumers have...

Question 9

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

Accepted Answer

The answer of Because the CPI is based on a...

Question 10

The introduction of a new good

Accepted Answer

With the introduction of a new good, consumers have more options and can potentially find a good that suits their needs and preferences better than what was previously available. This can lead to a decrease in the cost of maintaining the same level of economic well-being, as consumers can find a good that better meets their needs at a lower cost.

Question 11

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Accepted Answer

The Consumer Price Index (CPI) does not always effectively account for the introduction of new goods. When new products enter the market, they can offer more value or different options to consumers, which the CPI might not immediately or adequately reflect, thus not fully capturing changes in the cost of living or consumer preferences.

Question 12

If the quality of a good improves while its price remains the same, then the value of a dollar

Accepted Answer

If the quality of a good improves while its price remains the same, then the purchasing power of a dollar increases, meaning the value of a dollar rises. This leads to a decrease in the cost of living, as people can buy more with their dollars than before. Therefore, the correct answer is B.

Question 13

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

Accepted Answer

The answer of One of the widely acknowledged problems with...

Question 14

By not taking into account the possibility of consumer substitution, the CPI

Accepted Answer

The answer of By not taking into account the possibility...

Question 15

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

Accepted Answer

The introduction of the mobile phone is most relevant to the problem of "introduction of new goods" in the construction of the CPI. The creation of the mobile phone, which is now a commonly used good, was not accounted for in the CPI until it was introduced as a new good. This can lead to a bias in the CPI as the inflation rate may decrease due to the introduction of cheaper goods, but it does not necessarily reflect the true cost of living for consumers.

Question 16

Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

This situation is most relevant to the problem of unmeasured quality change, as the software being purchased is an upgraded version of the same product. This means that the newer version likely has improvements in quality that are not accounted for in the CPI.

Question 17

Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers deteriorates while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,

Accepted Answer

The answer of Suppose lawn mowers are part of the...

Question 18

Which of these events would cause the consumer price index to overstate the increase in the cost of living?

Accepted Answer

The answer of Which of these events would cause the...

Question 19

For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant?

Accepted Answer

The situation described in the question is most relevant to the problem of unmeasured quality change. As the size and materials of racquets change and improve, the quality of the racquets also changes. However, this improvement in quality is not captured by the CPI since the index only compares the prices of similar goods over time. Therefore, the CPI may overstate inflation for racquet sports since it does not account for the improvements in quality.

Question 20

Which of the following is the most accurate statement about the effects of quality change on the CPI?

Accepted Answer

The answer of Which of the following is the most...

Quiz 6: Measuring the Cost of Living

Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers. The consumer price index

When the quality of a good deteriorates while its price remains the same, the purchasing power of the dollar

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

If the quality of a good deteriorates while its price remains the same, then the value of a dollar

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

The introduction of a new good

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

If the quality of a good improves while its price remains the same, then the value of a dollar

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI

By not taking into account the possibility of consumer substitution, the CPI

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant?

Which of these events would cause the consumer price index to overstate the increase in the cost of living?

For some racquet sports, there have been increases in the size of the racquets; also, the methods and materials used for making racquets have improved. To which problem in the construction of the CPI is this situation most relevant?

Which of the following is the most accurate statement about the effects of quality change on the CPI?