Question

When the price of gasoline​ rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behavior is called ________.

Answer 1

CPI does not fully account for such changes in consumer behavior is called

substitution bias

Explanation:

• When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behavior is called substitution bias
• Substitution bias describes a possible bias in economic index numbers
• If the consumer behavior  do not incorporate data on consumer expenditures going from relatively more expensive products to cheaper ones as prices will change.
• Substitution bias is the price of a products when the consumer basket increases substantially, consumers tend to substitute lesser priced alternatives.
• Substitution bias is a genuine problem with a price index. Consumers can substitute goods in response to price changes.