Question

one problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. this problem is called question 4 options: price-change neglect. unmeasured quality change. substitution bias. relative bias.

Answer 1

The issue described is known as substitution bias, which occurs because the CPI does not account for consumers substituting less expensive goods for more expensive ones. This can cause the CPI to overstate the true cost of living changes.

Step-by-step explanation:

The problem with the Consumer Price Index (CPI) described by the question is known as substitution bias. When the price of a good rises, consumers often respond by buying less of it and seeking cheaper substitutes instead. Similarly, if a good's price falls, consumers may buy more of it. The CPI, which reflects the cost of a fixed basket of goods, ignores these substitutions by consumers. Consequently, the CPI may overstate changes in the cost of living, since it doesn't account for consumer behavior in response to changing prices and the fact that people can substitute away from goods whose relative prices have increased.

Efforts to address substitution bias and quality/new goods bias have been made, such as using alternative mathematical methods for calculating the CPI that allow for some substitution between goods. Updating the basket of goods more frequently to include new and improved goods can also mitigate these biases. In certain industries, such as computing, the Bureau of Labor Statistics (BLS) has conducted studies to measure quality improvement, adjusting the CPI to reflect changes in product characteristics. However, these adjustments are not without controversy and have been debated among economists.