Question

Suppose that the prices of dairy products have risen relatively less than prices in general over the last several years. To which problem in the construction of the CPI is this situation most relevant?

Answer 1

substitution bias

Step-by-step explanation:

The consumer price index measures the weighted price of an average basket of goods and how it changes as time goes by. The CPI is used to measure inflation, but one of the problems that it generally faces are substitution bias. For example, coffee has a relatively much larger weight in the CPI than tea because more people drink coffee than tea. But if the price of coffee increased severely, then some coffee consumers might decide to start drinking tea, but it will take many years for the CPI to be rearranged and show that change (the increase in tea consumption). This happens because the CPI is not adjusted every year, because its purpose is to measure price changes, but after a while this can result in problems by assigning unproper weights to certain products.

Answer 2

Substitution Bias

Step-by-step explanation:

CPI stands for Consumer Price Index which defines a measure of average prices consumer products.

Now if the prices among the category of consumer products vary not so relatively to one another then it s a bit difficult to measure CPI accurately.

The substitution bias can create an issue in consumer Price Index that when costumers go for the subsititure option, due to infaltion a customer can buy a cheaper product rather than sticking to same old product or choice