Question

For each scenario below, determine which challenge of measuring the true cost of living-quality improvements, new products, or substitution bias-a price index constructed 15 years ago would experience.

a. A typical family owns more cell phones and fewer landline telephones than it did a decade ago. The average price of a cell phone plan is lower than that of a residential line.
b. Very few households had high-speed internet connections 15 years ago. Now most households do and the average price has fallen each year.
c. Over the last 10 years, personal computers have gotten faster and acquired many new features that enable users to perform many more tasks.

Answer 1

The challenges for measuring the true cost of living in the scenarios are substitution bias for cell phones replacing landlines, new products bias for high-speed internet, and quality improvement bias for better and more feature-rich personal computers.

Step-by-step explanation:

For the scenario of a typical family owning more cell phones and fewer landline telephones, the challenge is mainly substitution bias. Households are substituting landlines with cell phones, and a price index from 15 years ago would not reflect this consumer behavior change, potentially overstating the cost of living.

In the case of high-speed internet becoming more prevalent and less expensive, the challenge is addressing new products. A price index from 15 years ago may not have included high-speed internet, and therefore, it would not capture the true expense and its effect on the cost of living.

Regarding the improvements in personal computers, the challenge is the quality improvement bias. Computers now offer more features and better performance than they did a decade ago, which isn't reflected accurately in a price index that's not regularly updated to account for these enhancements.