Question

Choose the correct statement. A. Changes in relative prices lead consumers to change the items they​ buy, and the CPI reflects this substitution. B. The CPI calculation assumes that everyone shops at discount stores and no one shops at convenience stores. C. When the quality of a good improves over​ time, the CPI does not include the portion of the price rise attributable to the higher quality in its calculation. D. The outlet substitution bias injects an upward bias into the CPI.

Answer 1

Answer:

A. Changes in relative prices lead consumers to change the items they buy, and the CPI reflects this substitution

Explanation:

Prices in the market are sustained by the offer and demand of a good. When there is a high demand on a product or service this make its price increase, therefore, some sectors of the population may have no longer an opportunity to acquire this good if the price is too high.

On the other hand, if the offer surpases the demand at a great scale, the value on the product or service will simply drop and when prices are low then, it becomes possible for a bigger ammount of consumers to acquire the good.

This model has a direct impact on the consumer's choice whereas to select one good or not taking into consideration it's price. Here is where the CPI feeds with this tendency on consumer's choices and exposes a general outlook to the public.