Question

The mid-1990s saw a rise in the use of mobile phones in the general population. The technology continued to improve in the early 2000s and in the mid-2000s smartphones revolutionized the way people communicated. The technology has changed very rapidly and improved the lives of consumers. With these rapid changes, what would you suspect has happened to the CPI calculation

Answer 1

The correct option is b. the CPI has understated the cost of living because of quality improvement bias.

Step-by-step explanation:

Note: This question is not complete as it does not include the answer options. The answer options are therefor provided before answering the question as follows:

a. The CPI has overstated the cost of living because of income bias.

b. The CPI has understated the cost of living because of quality improvement bias.

c. The CPI has overstated the cost of living because of quality improvement bias.

The explanation of the answer is now provided as follows:

The Consumer Price Index (CPI) can be described as a metric that measures the average change in prices paid for a market basket of consumer goods by urban consumers over time.

Quality improvement bias occurs when price indexes do not incorporate information about good quality over time in addition to their nominal price.

Better and greater speeds and functionalities have become available as a result of advancements in computer chips and improved the lives of consumers, all without incorporating the information in CPI.

Therefore, the correct option is b. the CPI has understated the cost of living because of quality improvement bias.