Question

With respect to the consumer price index, the substitution bias arises because:

Answer 1

Answer:

a. prices of goods and services do not change in the same proportion from year to year.

Explanation:

Substitution bias describes a possible bias in economic index numbers if they do not incorporate data on consumer expenditures switching from relatively more expensive products to cheaper ones as prices changed.

Substitution bias occurs when prices of items change relatively to one another. It considers how consumer expenditures are reflected in a consumer price index. Consumers will tend to buy more of the good whose price declined, and less of the now relatively more expensive good.