Question

Describe three problems that make consumer price index an imperfect measure of the cost of living?

Answer 1

Three problems that make Consumer Price Index an imperfect measure of the cost of living are substitution bias, quality/new goods bias, and subjectivity.

Step-by-step explanation:

Three problems that make Consumer Price Index an imperfect measure of the cost of living are:

1. Substitution bias: CPI uses a fixed basket of goods and doesn't account for consumers substituting cheaper goods for more expensive ones.
2. Quality/new goods bias: CPI doesn't consider improvements in the quality of goods or the introduction of new goods.
3. Subjectivity: CPI fails to capture individual preferences and satisfaction levels.