Question

Choose the correct statement. A. Changes in relative prices lead consumers to change the items they​ buy, and the CPI reflects this substitution. B. The CPI calculation assumes that everyone shops at discount stores and no one shops at convenience stores. C. When the quality of a good improves over​ time, the CPI does not include the portion of the price rise attributable to the higher quality in its calculation. D. The outlet substitution bias injects an upward bias into the CPI.

Answer 1

The correct statement is A: Changes in relative prices do lead consumers to change the items they buy, and the CPI has been adjusted to reflect this substitution by employing alternative mathematical methods.

Step-by-step explanation:

Among the statements provided, the correct one is statement A, which acknowledges the role of substitutability in consumer behavior and its representation in the CPI. The Bureau of Labor Statistics (BLS) has taken steps to address the biases in the calculation of the Consumer Price Index (CPI). By adopting alternative mathematical methods that allow for some substitution between goods and by updating the basket of goods more frequently, the BLS has aimed to better reflect actual changes in consumer spending and the cost of living. This means that changes in relative prices do lead consumers to change the items they buy, and the CPI has evolved to reflect this substitution.

Answer 2

A. Changes in relative prices lead consumers to change the items they buy, and the CPI reflects this substitution

Step-by-step explanation:

Prices in the market are sustained by the offer and demand of a good. When there is a high demand on a product or service this make its price increase, therefore, some sectors of the population may have no longer an opportunity to acquire this good if the price is too high.

On the other hand, if the offer surpases the demand at a great scale, the value on the product or service will simply drop and when prices are low then, it becomes possible for a bigger ammount of consumers to acquire the good.

This model has a direct impact on the consumer's choice whereas to select one good or not taking into consideration it's price. Here is where the CPI feeds with this tendency on consumer's choices and exposes a general outlook to the public.