**Understanding Consumer Price Index (CPI) Biases**When evaluating changes in the Consumer Price Index (CPI), it is important to recognize the different types of biases that can affect CPI accuracy. The multiple-choice question below illustrates a practical scenario in which an increase in the price of bananas leads consumers to buy fewer bananas and more grapes, potentially introducing various forms of bias into the CPI measurement.---**Question:**If there is an increase in the price of bananas that causes consumers to purchase fewer pounds of bananas and more pounds of grapes, the CPI will suffer from:a. substitution biasb. bias due to the introduction of new goodsc. bias due to unmeasured quality changed. base-year biase. none of the answer choices---**Explanation of Choices:**- **Substitution Bias:** This occurs when consumers change their purchasing habits due to price changes of individual goods. In the given scenario, consumers would substitute bananas with grapes because bananas became more expensive. This substitution is not immediately reflected in the fixed basket of goods used to calculate CPI, leading to inaccuracies.- **Bias Due to the Introduction of New Goods:** This type of bias happens when new products are introduced and are not quickly included in the market basket used for CPI calculations.- **Bias Due to Unmeasured Quality Change:** This bias arises if the quality of goods changes but these changes are not measured or adjusted for in the CPI.- **Base-Year Bias:** This involves errors stemming from using outdated consumption patterns and prices from a predefined base year, which may not reflect current consumer behavior.- **None of the Answer Choices:** Choosing this option means none of the explanations provided above apply to the given scenario.In this case, the correct answer would be **a. substitution bias**, as the scenario specifically describes consumers substituting one good (bananas) for another (grapes) due to a price increase.Understanding and identifying these biases is crucial for interpreting CPI data accurately and for making informed economic decisions.---**Graph/Diagram Explanation:**No graphs or diagrams are present in this example. If there were graphs or charts, they would likely illustrate the shifts in consumer purchasing behavior or CPI calculation methodologies. For instance, a graph may show the changing quantities of bananas and grapes purchased over time or a comparison of the CPI with and without adjustments for substitution bias.

The Consumer Price Index measures the overall change in consumer prices based on a representative…

If there is an increase in the price of bananas that causes consumers to purchase fewer pounds of bananas and more pounds of grapes, the CPI will suffer from a. substitution bias b. bias due to the introduction of new goods Ocbias due to unmeasured quality change d. base-year bias e none of the answer choices

If there is an increase in the price of bananas that causes consumers to purchase fewer pounds of bananas and more pounds of grapes, the CPI will suffer from a. substitution bias b. bias due to the introduction of new goods Ocbias due to unmeasured quality change d. base-year bias e none of the answer choices

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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