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?

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Definitions:

Straight-Line Method

A method of calculating depreciation or amortization by evenly allocating the cost of an asset over its useful life.

Adjusting Entry

A journal entry made at the end of an accounting period to allocate income and expenditures to the correct period for accurate financial reporting.

Sold at a Discount

A transaction where goods or services are sold for a price lower than their usual or market rate.

Face Value

The nominal or stated value of a financial instrument, such as a bond or stock, as defined by the issuer.