Question

The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket.

a. change; over-estimates
b. change; under-estimates
c. do not change; over-estimates
d. do not change; under-estimates

Answer 1

Option C

Step-by-step explanation:

Substitution bias identifies a potential distortion in economic indicator statistics as it does not include data on customer purchases that moves from comparatively more costly goods to inexpensive ones as rates shift. Substitution prejudice arises as the quality of products varies compared to each other.

The substitution prejudice relates to the Consumer Price Index flaw that exaggerates inflation as it does not take into consideration the substitution effect as buyers want to swap one good for another when their demand is higher than the commodity they usually purchase.

Thus, from the above we can conclude that the correct option is C.