Answer to Question #164372 in Finance for Ryan Neal

Question

In Virtual Reality, time travel became possible only in 3002. Economists in the Statistics Bureau decided to conduct a Consumer Expenditure Survey in both 3001 and 3002 to check the substitution bias of the CPI.

Answer 1

Substitution Bias

This happens when there is a substantial increase in prices of one of the products and consumers substitute it for some other good. CPI does not capture such changes.

It leads to overstating of inflation as CPI Shoots up because of the considerable price increase.

There is substitution bias because the price of the trend in 3002 went up compared to the price in 3001 and made a huge difference in consumption expenditure.