Question

The effect of substitution bias is that the rise in the price of a fixed basket of goods over time tends to ___________________ the rise in a consumer's true cost of living, because it doesn't take into account that the person can substitute between goods according to changes in their relative prices.stabilizeunderstateoverstatereduce

Answer 1

Answer:

overstate.

Explanation:

An unchanging basket of goods assumes that consumers are restricted from purchasing exactly the corresponding goods, without caring for changes of the price which are not a very likely hypothesis. The result of substitution bias is that the increase in the price of a fixed basket of goods over time tends to overstate the rise in the true cost of living of the consumer because it does not take into consideration that the person can substitute away from goods whose corresponding prices have increased.