By Not Taking into Account the Possibility of Consumer Substitution

question 60

Multiple Choice

By not taking into account the possibility of consumer substitution, how is the CPI biased?

• A)It understates the cost of living.
• B)It overstates the cost of living.
• C)It may overstate or understate the cost of living depending on how much prices rise.
• D)It doesn't accurately reflect the cost of living, but it is unclear if it overstates or understates the cost of living.

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Definitions:

Pooling of Interests

An accounting method used in business combinations that treats the entities as if they have been combined retroactively, distributing the equity shares among the combined entity's shareholders.

Purchase Method

An accounting method used to consolidate the financial statements of a parent company and its subsidiaries, reflecting the purchase of one entity by another.

Statutory Consolidation

The process of combining the financial statements of a group of companies into one, as required by law, to present the financial condition and operations of the group as a single entity.

Legal Corporations

Business entities that are legally recognized as individual entities with rights and liabilities distinct from those of their members or shareholders.