By not taking into account the possibility of consumer substitution, the CPI

(A) understates the cost of living.

(B) overstates the cost of living.

(C) may overstate or understate the cost of living, depending on how quickly prices rise.

(D) may overstate or understate the cost of living, regardless of how quickly prices rise.

Question

Business

Arielle Lamb

16 February, 02:30

By not taking into account the possibility of consumer substitution, the CPI

(A) understates the cost of living.

(B) overstates the cost of living.

(C) may overstate or understate the cost of living, depending on how quickly prices rise.

(D) may overstate or understate the cost of living, regardless of how quickly prices rise.

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Answers (1)

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Kinsley Orr · Answer 1

(B) overstates the cost of living.

Explanation:

By not taking into account the possibility of consumer substitution, the CPI

overstates the cost of living.

This one of the limitations of the CPI which is Consumer product index.

CPI is the weighted index of goods purchased by consumers. It does not take into account the availibilty of substitute goods in market and hence over estimates the living cost.