Identify which of the following statements is false. The "substitution bias" of the CPI:
A)means that the CPI can either understate or overstate the actual change in cost of living faced by consumers.
B)refers to the fact that the CPI measures the change in expenditures necessary to consume a fixed basket of goods, whereas in reality the optimal consumption basket changes as prices change.
C)can be corrected partially by periodically updating the fixed basket of goods used in calculations.
D)refers to the fact that those who construct the CPI are biased away from including certain types of goods in the fixed basket of goods used in their calculations.

Question

Quizplus · Accepted Answer

The statement "refers to the fact that those who construct the CPI are biased away from including certain types of goods in the fixed basket of goods used in their calculations" is false. The substitution bias actually refers to the fact that consumers may substitute cheaper goods for more expensive goods as relative prices change, but the CPI assumes they continue to purchase the same basket of goods. The statement that "refers to the fact that those who construct the CPI are biased away from including certain types of goods in the fixed basket of goods used in their calculations" is false. The substitution bias refers to the fact that the CPI measures the change in expenditures necessary to consume a fixed basket of goods, whereas in reality, consumers may substitute cheaper goods for more expensive ones as prices change. This can lead to an overstatement of the true increase in the cost of living. However, this bias can be corrected partially by periodically updating the fixed basket of goods used in calculations.

Identify Which of the Following Statements Is False