Which of the following best explains why the consumer price index (CPI) may not accurately measure changes in the cost of living?

Choose 1 answer:
(A) When prices of some goods go up, consumers buy less of those and more of goods that are cheaper
(B) It only includes goods purchased every day
(C) It does not account for changes in consumers' incomes
(D) When real GDP increases, the CPI doesn't change
(E) It doesn't include all prices, such as input costs to firms

Question

Which of the following best explains why the consumer price index (CPI) may not accurately measure changes in the cost of living?

Choose 1 answer:
(A) When prices of some goods go up, consumers buy less of those and more of goods that are cheaper
(B) It only includes goods purchased every day
(C) It does not account for changes in consumers' incomes
(D) When real GDP increases, the CPI doesn't change
(E) It doesn't include all prices, such as input costs to firms

Accepted Answer

***A*** ∻Key Concept∻ ⚹Substitution Bias⚹ ∻Explanation∻ ⚹The CPI may not accurately measure changes in the cost of living because it does not fully account for the substitution effect, where consumers may change their purchasing habits when prices of certain goods increase, opting for cheaper alternatives.⚹◊How does the substitution effect in consumer behavior impact the accuracy of the Consumer Price Index (CPI) in measuring changes in the cost of living?⍭ Generate me a similar question◊

Sia