Question

Changes in the CPI overstate the true inflation rate due to four​ "biases." If apple prices rise rapidly during the month while orange prices​ fall, consumers will reduce their apple purchases and increase their orange purchases. Which of the four biases is concerned with this consumer​ behavior?

Answer 1

The answer is: Substitution bias

Step-by-step explanation:

In plain simple words, substitution bias refers to the fact that the CPI considers that customers have to buy the same item and in the same quantity each month. That is something rarely happens in "normal" life. The CPI uses a fixed basket of products, that someone for some reason determined was the most representative basket of products a family buys every month. But what happens if consumers decide to not follow this given basket of goods or decides to substitute some of its products for others (instead of Coke I might decide to buy Pepsi because it offers me a 15% discount).