The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price,and the CPI does not reflect this and ________ the cost of the market basket.
A)change; overestimates
B)change; underestimates
C)do not change; overestimates
D)do not change; underestimates

Question

Quizplus · Accepted Answer

Substitution bias occurs because consumers alter their consumption in response to changes in relative prices, opting for cheaper alternatives when prices rise. The CPI, which is based on a fixed basket of goods, fails to account for this behavior and thus tends to overestimate the true cost of living by not reflecting the substitutions consumers make towards less expensive options.

The Substitution Bias in the Consumer Price Index Refers to the Idea