Question

The substitution problem with a fixed-weight index means that the index does not accurately reflect the changes from one year to the next when:

a.the economy produces different products so the market basket changes.
b.consumers demand less relatively high-priced goods and more relatively low-priced goods.
csuppliers try to sell higher profit items and cease producing lower profit items.
d.structural changes occur in the economy

Answer 1

The substitution problem with a fixed-weight index means that the index does not accurately reflect the changes from one year to the next when: consumers demand less relatively high-priced goods and more relatively low-priced goods. This is not reflected in a fixed basket of goods. Option B.

Step-by-step explanation:

The term substitution bias refers to an issue with calculating an inflation rate using a fixed basket of goods over time.

This method tends to overstate the true rise in the cost of living since it does not account for the consumer's ability to substitute for cheaper goods when the prices of items in the fixed basket increase substantially.

The substitution problem with a fixed-weight index arises when: consumers demand less relatively high-priced goods and more relatively low-priced goods.

This reflects the consumer's natural reaction to price changes by altering consumption patterns, which is not captured by a static market basket.

By the early 2000s, the Bureau of Labor Statistics (BLS) began using alternative mathematical methods to allow for some substitution between goods in the calculation of the Consumer Price Index (CPI),

However, it also updated the basket of goods more regularly to include new and improved goods faster.

Despite these efforts, adjusting for substitution bias and improvements in product quality remains a challenging and sometimes controversial task among economists.

Hence, the right answer is option B.