What Does the "Substitution Bias" in the Consumer Price Index

question 105

Multiple Choice

What does the "substitution bias" in the consumer price index refer to?

• A)substitution of new goods for old goods in the purchases of consumers
• B)substitution of quality for quantity in consumer purchases over time
• C)the fact that consumers substitute toward goods that have become relatively less expensive
• D)substitution of new prices for old prices in the basket of goods from one year to the next

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Definitions:

Neoclassical Assumption

Underlying principles of neoclassical economics that include rationality, individuals maximizing utility, firms maximizing profits, and markets tending toward equilibrium.

Rational Behavior

Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility. See rational.

Cognitive Biases

Systematic patterns of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.

Behavioral Economists

Experts in a field of economics that combines insights from psychology to understand how people make economic decisions.