Final answer:
When there is a decline in the quality of a good and its price remains the same, the CPI will be overstated as it does not fully capture the reduction in consumer value, resulting in a quality/new goods bias.
Step-by-step explanation:
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. When there is a decline in the quality of a good and its price remains the same, the CPI will be overstated. This is because the CPI does not fully account for the drop in quality, making the actual value received by the consumer lower than what the CPI suggests. Therefore, the correct answer to the question is:
c. overstated; decline
This is because, with a decline in quality but no change in price, consumers are effectively getting less for their money, which the CPI might not fully capture. The CPI's tendency to not incorporate quality improvements or new goods efficiently can result in a quality/new goods bias. This bias suggests that the CPI may falsely indicate a rise in the cost of living. This is important as it can lead to misconceptions about the true rate of inflation.