The substitution bias in the consumer price index refers to the
A)substitution by consumers toward new goods and away from old goods.
B)substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods.
C)substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.
D)substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

Question

Quizplus · Accepted Answer

The substitution bias in the consumer price index refers to the phenomenon where consumers tend to replace goods and services in their shopping basket with other similar goods and services that have become relatively less costly. This behavior of consumers leads to the inflation rate calculated by CPI to be overstated because the CPI ignores the fact that consumers are substituting towards goods that are becoming cheaper. Thus, the best answer is option C. The other options are incorrect because the CPI does not directly account for substitution towards new goods or high-quality products. Similarly, option D is incorrect because the substitution bias does not relate to the substitution of new prices for old prices in the CPI basket.

The Substitution Bias in the Consumer Price Index Refers to the