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Why Does the Substitution Bias Cause the Consumer Price Index

question 115

Essay

Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living?


Definitions:

Minimum Wage

The lowest legal salary that employers can pay to workers, aimed at protecting workers from exploitation.

Equilibrium Employment

The level of employment where the quantity of labor supplied is equal to the quantity of labor demanded.

Labor-Force Participation

The percentage of the working-age population that is engaged in the labor market, either employed or actively seeking employment.

Minimum Wage

The lowest legally permissible hourly wage that companies can pay to employees.

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