The substitution bias refers to
A) The failure of the Laspeyres index to capture a consumer's tendency to purchase the same bundle of goods as prices change
B) The substitution effect is positive for a price increase
C) The substitution effect is negative for an inferior good
D) The failure of the Laspeyres index to capture a consumer's tendency to substitute away from goods that have become more expensive

Question

Quizplus · Accepted Answer

The substitution bias refers to the failure of the Laspeyres index to capture a consumer's tendency to substitute away from goods that have become more expensive. This occurs because the Laspeyres index uses fixed weights to calculate the cost of a bundle of goods, ignoring consumers' responses to relative price changes.

The Substitution Bias Refers to