Commodity substitution bias _______ when the CPI is calculated in 2021 using the 2020 market basket because _______. A.exists; over time preferences change and people prefer to eatpizzarather thanpasta B.does not exist;pizzaandpastaare not substitutes C.exists; people switch from the relatively more expensivepastato the relatively less expensivepizza D.does not exist; the CPI market basket is updated frequently to eliminate substitution bias Question 5The BLS wants to check the CPI commodity substitution bias so they conduct aConsumer Expenditure Survey in 2020 and 2021. The table shows the surveyresults.2020Item Quantity PricePizza5$4Pasta 15$32021Quantity Price10$45$6The BLS sets the reference base year as 2020 and uses the market basket from2020.Is there a commodity substitution bias in the CPI that uses the 2020 marketbasket?

Answered: Commodity substitution bias _______…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Commodity substitution bias _______ when the CPI is calculated in 2021 using the 2020 market basket because _______.

exists; over time preferences change and people prefer to eat

pizza

rather than

pasta

does not exist;

pizza

and

pasta

are not substitutes

exists; people switch from the relatively more expensive

pasta

to the relatively less expensive

pizza

does not exist; the CPI market basket is updated frequently to eliminate substitution bias

Question 5
The BLS wants to check the CPI commodity substitution bias so they conduct a
Consumer Expenditure Survey in 2020 and 2021. The table shows the survey
results.
2020
Item Quantity Price
Pizza
5
$4
Pasta 15
$3
2021
Quantity Price
10
$4
5
$6
The BLS sets the reference base year as 2020 and uses the market basket from
2020.
Is there a commodity substitution bias in the CPI that uses the 2020 market
basket?

Expert Solution

Step 1

In a market, commodity substitution bias refers to the Sita when CPI does not take a change in commodity by using its substitute, into account, due to which the value of actual inflation rate may be overstated with the rise in price.

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