Question

which of the following is not considered one of the potential biases in calculating the consumer price index?
a. substitution bias.
b. coverage bias.
c. increase in quality bias.
d. new product bias.
e. outlet bias.
to have no substitution bias, what shape would the demand curve need to be for the products in the market basket?
to have no substitution bias, the demand curves for the products in the market basket would need to be vertical
which of the following steps has not been taken by the bureau of labor statistics (bls) to reduce the size of the biases in the cpi?
a. the bls has expanded the number of stores from which it collects the price information to reduce the coverage bias.
b. the bls has reduced the size of the outlet bias by conducting a point - of - purchase survey to track where consumers make their purchases.
c. the bls has reduced the size of the substitution bias and the new product bias by updating the market basket every two years instead of every ten years.
d. the bls has used statistical methods to reduce the size of the quality bias.

Explanation:

• First question: The Consumer Price Index (CPI) has several potential biases. Substitution bias occurs when consumers substitute goods due to price changes. Increase in quality bias is when quality improvements are not fully accounted for. New product bias is related to new products not being immediately included. Outlet bias is about where consumers buy. Coverage bias is not a recognized bias in CPI calculation.
• Second question: Substitution bias occurs when consumers substitute goods when prices change. If demand curves are vertical (perfectly inelastic), consumers do not substitute, so no substitution bias.
• Third question: The BLS has not expanded stores to reduce coverage bias (as coverage bias is not a real CPI bias). It has taken steps like point - of - purchase surveys (outlet bias), updating the market basket (substitution and new product bias), and using statistical methods (quality bias).

Answer:

• First question: B. Coverage bias
• Second question: Vertical
• Third question: A. The BLS has expanded the number of stores from which it collects the price information to reduce the coverage bias.