In 2000, You Could Buy a Cadillac DTS for $45,000

question 223

Multiple Choice

In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags along with other similar features) , the 2011 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create

• A) an upward bias in the CPI as a result of commodity substitution bias.
• B) a downward bias in the CPI as a result of new goods bias.
• C) an upward bias in the CPI as a result of quality change bias.
• D) a downward bias in the inflation rate.

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Definitions:

Pure Monopolist

A market participant that is the sole supplier of a unique product without close substitutes, possessing significant control over market prices.

Total Revenue

The total income earned by a firm from selling its products or services.

Demand Schedule

A presentation showing the level of demand from buyers for a product or service, matched to their willingness and ability to pay at various price scales.

Socially Optimal

Refers to the most efficient allocation of resources from society's point of view, where social welfare is maximized.