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for each scenario, determine which bias is preventing a price index constructed 15 years ago from measuring the true cost of living. a. a typical family owns more cell phones and fewer landline telephones than it did a decade ago. the average price of a cell phone plan is lower than that of a residential line.

User Lohan
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Final answer:

The bias preventing a price index constructed 15 years ago from measuring the true cost of living is the substitution bias.

Step-by-step explanation:

The bias that is preventing a price index constructed 15 years ago from measuring the true cost of living in this scenario is the substitution bias.

This bias occurs when consumers change their buying habits in response to changes in relative prices. In the given scenario, the average family now owns more cell phones and fewer landline telephones, and the average price of a cell phone plan is lower than that of a residential line.

However, the price index constructed 15 years ago may still assume that the family purchases an identical fixed basket of goods, which does not reflect the current consumption patterns.

As a result, the price index may not accurately capture the true cost of living because it does not account for the fact that people can substitute away from goods whose relative prices have changed over time.

User Rismo
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