Michelle bought word-processing software in 2009 for $75. Michelle's cousin, Barry, bought an upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is this situation most relevant?

a. substitution bias

b. unmeasured quality change

c. introduction of new goods

d. income bias

The correct answer is option b.

Explanation:

Consumer price index measures inflation rate or changes in the general price level through a basket of goods generally purchased by the consumers.

In the given example, Michelle purchases a software in 2009 for $75.

In the next year, her cousin purchases an update of the same software at $75.

Since the price of the product is not changing, the CPI will also not change.

Because of update, the quality of the software has improved but it will not be included in the CPI.