Final answer:
Improving quality of products would understate the consumer price index because the CPI may not fully account for these improvements, leading to an understated inflation rate.
Step-by-step explanation:
Which of the following would understate the consumer price index? The correct option is c. Improving quality of products.
Option (a) substitution bias tends to overstate the true rise in cost of living in the Consumer Price Index (CPI) because it does not take into account that consumers can substitute away from goods whose prices rise considerably. Thus, if consumers switch to less expensive alternatives as prices change, the CPI, using a fixed basket of goods, may reflect a higher cost of living than actually experienced by consumers.
Option (b), which suggests deteriorating quality of products, is not a recognized bias in CPI calculations, and option (d), the law of demand bias, is not a standard economic term related to CPI calculation inaccuracies.
Option (c) implies that if the quality of products is improving over time but the CPI does not fully account for these improvements, the index may not reflect the true value consumers are receiving, leading to an understated measure of inflation. For certain products, the Bureau of Labor Statistics carries out studies to measure quality improvements and to adjust the change in price after accounting for these product changes. However, these adjustments are not perfect and are a source of controversy among economists.