If there is an increase in the price of apples which causes consumers to purchase fewer kilograms of apples and more kilograms of oranges, the CPI will suffer from ?
Correct answer: B. substitution bias
- A. none of these answers
- B. substitution bias
- C. base year bias
- D. bias due to unmeasured quality change
- E. bias due to the introduction of new goods.
Explanation
A fixed consumption basket does not fully reflect consumers switching from costlier apples to oranges, so the CPI may overstate the rise in the cost of living. This is called substitution bias.
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