Which of the problems in the construction of the CPI might be illustrated by each of the following situations?
Substitution Bias, Introduction of New Goods, Unmeasured Quality Change
1. The invention of the iPod
2. The introduction of air bags in cars
3. Increased personal computer purchases in response to a decline in their price
4. More scoops of raisins in each package of Raisin Bran
5. Greater use of fuel-efficient cars after gasoline prices increase
1. The invention of the iPod: Introduction of New Goods. The introduction of iPods represents a new product with new features and capabilities, which the CPI must now account for in its measurement of inflation.
2. The introduction of airbags in cars: Unmeasured Quality Change. The introduction of airbags improves the safety and overall quality of cars, but the change in quality may not be accurately captured in the CPI measurements.
3. Increased personal computer purchases in response to a decline in their price: Substitution Bias. As personal computer prices decrease, consumers may substitute them for other, more expensive goods. However, the CPI may not adequately capture this substitution, which can result in an overestimation of the cost of living.
4. More scoops of raisins in each package of Raisin Bran: Unmeasured Quality Change. The increase in raisins per package represents an improvement in the quality of the cereal, but this may not be accurately reflected in the CPI calculations.
5. Greater use of fuel-efficient cars after gasoline prices increase: Substitution Bias. As gasoline prices increase, consumers may switch to more fuel-efficient vehicles. The CPI may not fully capture this substitution, which can lead to inaccuracies in the measurement of inflation.
1. The situation of the invention of the iPod may illustrate the problem of "Introduction of New Goods" in the construction of the Consumer Price Index (CPI). The CPI measures changes in the prices of a fixed basket of goods and services, but when new goods like the iPod are introduced, they may not be initially included in the basket. Therefore, the CPI may not fully capture the impact of these new goods on consumer behavior and their prices.
2. The situation of the introduction of airbags in cars may illustrate the problem of "Unmeasured Quality Change" in the construction of the CPI. Airbags improve the safety and quality of cars, but they are not directly reflected in the price of car models. As a result, the CPI may not accurately capture changes in the quality of goods, leading to an underestimation of the true increase in the standard of living.
3. The situation of increased personal computer purchases in response to a decline in their price may illustrate the problem of "Substitution Bias" in the construction of the CPI. When the price of personal computers declines, consumers tend to buy more of them, which increases their weighting in the consumption basket. However, the CPI assumes a fixed basket of goods and does not fully account for the substitution effect. Therefore, the CPI may overestimate the true inflation rate if it fails to properly capture changes in consumer behavior.
4. The situation of more scoops of raisins in each package of Raisin Bran may not illustrate any specific problem in the construction of the CPI. Unless the price of the Raisin Bran changes as a result of the increased quantity of raisins, this situation would not have a direct impact on the calculation of the CPI.
5. The situation of greater use of fuel-efficient cars after gasoline prices increase may also illustrate the problem of "Substitution Bias" in the construction of the CPI. When gasoline prices increase, consumers may switch to more fuel-efficient cars or alternative modes of transportation. However, the CPI does not fully account for this substitution effect and may overestimate the true inflation rate by not reflecting the changes in consumer behavior accurately.
To determine which problem in the construction of the Consumer Price Index (CPI) might be illustrated by each of the given situations, let's analyze them one by one.
1. The invention of the iPod: This situation illustrates the problem of the Introduction of New Goods. The CPI is designed to measure changes in the prices of a fixed basket of goods over time. When new goods or products are introduced into the market, like the iPod in this case, the CPI may not adequately capture their impact on consumer behavior and inflation.
2. The introduction of air bags in cars: This situation also illustrates the problem of the Introduction of New Goods. The introduction of airbags resulted in a new safety feature for cars, which could affect consumer preferences and impact their purchasing decisions. If the CPI fails to account for these new goods, it may not accurately reflect changes in the cost of living.
3. Increased personal computer purchases in response to a decline in their price: This situation illustrates the problem of Substitution Bias. If the price of personal computers decreases, consumers may choose to buy more computers and reduce their spending on other goods. However, the CPI assumes a fixed basket of goods, and it does not fully account for the fact that consumers can substitute goods based on their relative prices. This leads to an overestimation of the cost of living.
4. More scoops of raisins in each package of Raisin Bran: This situation illustrates the problem of Unmeasured Quality Change. If a manufacturer increases the quantity or improves the quality of a product (such as adding more raisins to Raisin Bran), it can be difficult for the CPI to accurately measure the change in value received by consumers. The CPI assumes constant quality and may not fully account for improvements or changes in the products over time.
5. Greater use of fuel-efficient cars after gasoline prices increase: This situation also illustrates the problem of Substitution Bias. When gasoline prices increase, consumers may choose to buy more fuel-efficient cars or opt for more public transport, resulting in a change in their consumption pattern. However, the CPI's fixed basket of goods does not reflect this substitution effect accurately, leading to an overestimation of the cost of living.
In summary, the given situations demonstrate different problems in the construction of the CPI, including the Introduction of New Goods, Substitution Bias, and Unmeasured Quality Change.