Question

14. Which of the following statements is (are) correct?
(x) One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called substitution bias.
(y) By not taking into account the possibility of consumer substitution, the CPI understates the cost of living.
(z) Suppose the typical consumer buys more bananas than oranges. In fixing the basket of goods and services for the purpose of calculating the consumer price index, the Bureau of Labor Statistics places more weight on the price of bananas than on the price of oranges since the weights of the two prices are determined by surveying consumers.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

15. Which of the following statements is (are) correct?
(x) When new goods are introduced, consumers have more variety from which to choose. Since consumers value variety, each dollar is worth more, and the cost of living decreases.
(y) Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy, but not in the market basket, causes the CPI to overestimate the cost of living.
(z) When a new good or service is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Answer 1

Q14) option C)

X & Z are true

X is true, Substitution bias is bcoz CPI is based on fixed market basket of goods & services, & this basket is not changed frequently,

So when cheaper goods are replaced in Consumption basket, & not captured in CPI , then Substitution bias

.

Z is true, bcoz the weights are assigned to Different goods in CPI basket, as per the share of that good in Consumer expenditure

.

Y is false, bcoz Substitution bias tends to overstate the actual CPI

.

15) option A)

Y is true, if new goods aren't included, then CPI tends to overestimate the Cost of living .

X & Z are also true

When new goods are introduced, then they are better in quality, choices Increase, so COLI cost of living index falls