Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.
a. the invention of the Sony Walkman
b. the introduction of air bags in cars
c. increased personal computer purchases in response
to a decline in their price
d. more scoops of raisins in each package of Raisin Bran
e. greater use of fuel-efficient cars after gasoline prices increase
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a. The situation of the invention of the Sony Walkman might illustrate the problem of "new goods bias" in the construction of the Consumer Price Index (CPI). New goods bias refers to the difficulty in accurately accounting for the introduction of new products or technologies in the market. In this case, the CPI may not immediately reflect the impact of the Sony Walkman on consumer spending patterns and overall price levels due to the lag in data collection and the incorporation of new goods into the index.
To get the answer, one can research the concept of "new goods bias" in the CPI and its implications. Additionally, studying how the CPI tracks changes in consumer spending patterns and product innovations can help understand the specific problem illustrated by the invention of the Sony Walkman.
b. The introduction of air bags in cars might illustrate the problem of "quality change bias" in the construction of the CPI. Quality change bias refers to the challenge of accurately accounting for changes in the quality of goods or services over time. In this case, the CPI may not fully capture the improvement in automobile safety due to the introduction of air bags, leading to an underestimation of the true value consumers are getting for their money.
To understand this concept, one can research the idea of "quality change bias" in CPI calculation and explore how improvements in product quality are measured and incorporated into the index.
c. The increased personal computer purchases in response to a decline in their price might illustrate the problem of "substitution bias" in the construction of the CPI. Substitution bias refers to the challenge of adequately adjusting the CPI for changes in consumer behavior and their substitution patterns when prices of goods change. In this case, the CPI might not accurately reflect the increase in personal computer purchases because it may not fully account for the shifting consumer preferences and substitution away from other products in response to the decline in personal computer prices.
To find the answer, one can research the concept of "substitution bias" in the CPI and its impact on measuring price changes accurately. Understanding how consumer preferences and substitution patterns are factored into the CPI calculations can further shed light on this problem.
d. The situation of more scoops of raisins in each package of Raisin Bran might not necessarily illustrate a problem in the construction of the CPI. Unless the price of each box of Raisin Bran remains the same despite the increase in the quantity of raisins, it would be a straightforward case of "quantity change" rather than a problem with the CPI. To confirm, one can check if the price of Raisin Bran has remained constant alongside the increase in the number of raisin scoops in each package.
e. The greater use of fuel-efficient cars after gasoline prices increase might also not directly illustrate a problem in constructing the CPI. The CPI typically measures changes in the prices of goods and services, rather than changes in consumer behavior or market dynamics. However, one could argue that if the CPI does not adequately account for changes in consumer behavior resulting from price changes, it might be considered a form of "substitution bias." In this scenario, the CPI might not fully capture the shift towards fuel-efficient cars if it does not accurately account for changing consumer preferences and substitution patterns.
To confirm, one can research the concept of "substitution bias" in the CPI, and its impact on measuring price changes accurately in relation to changes in consumer behavior. Understanding the specific assumptions and methodologies used in the CPI's construction can provide insights into whether this situation raises any concerns regarding the index.
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a. It suddenly became indispensible in daily life. And it replaced a lot of products like am/fm radios.
b. it became essential. and it saved lives which is hard to value.
c. increased productivity by workers tremendously. More people can work at home and cut travel time.
d. this did not happen. But if it did, it lowers the per raisin price and cuts profit for the raisin makers.
e. it makes 2 classes of cars where previously there had been only "cars" as a category..
Do a little research and then take a shot. what to you think?
Hints: The CPI is calculated by looking at the change in prices of a "market" basket of goods. It does not deal well with 1) technological changes, 2) mandated changes, 3) improved qualities, 4) shifting of purchases in response to price changes, or 5) shifting of tastes