Which of the problems in the construction of the CPI might be illustrated by each of the following situations?

Question

 
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

Answer 1

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.