Question

Changes in the CPI overstate the true inflation rate due to four "biases". If apple prices rise rapidly during the month while orange prices fall, consumers may reduce their apple purchases and increase their orange purchases.
Which of the four biases is concerned with this tendency?
A. The new product bias
B. The substitution bias
C. The increase in quality bias
D. the outlet bias

Answer 1

Answer: the substitution bias

                                 

Explanation: The substitution bias shows the tendency of consumers of buying less costly good in place expensive one.

In the given case when the price of apple rises and the price of oranges falls then the consumer will purchase more of the oranges. In such a scenario the index will rise showing that the good which was purchased earlier by the consumers has risen however in the real world the consumer shave sifted their demand to a less expensive product.

Thus, it will lead to overstatement of substitution bias.