A rise in the price of apples leads consumers to buy fewer kilograms of apples and more kilograms of oranges. Which bias will this create in the CPI?
Correct answer C. Substitution bias
Explanation
The CPI uses a fixed basket, so it ignores consumers switching to relatively cheaper goods. It therefore overstates the true rise in the cost of living, which is known as substitution bias.
Answer checked How we write and check questions
Discussion