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### Homework 7

Course: ECON 106, Spring 2012
School: DePaul
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Word Count: 281

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106 ECO Assignment Taylor____ Name __Alexander Instructions: Read the posted article, Adjusting the Consumer Price Index by Schnepper (1996), then answer the following questions. (Make sure to type your answers!) 1. Provide an example of substitution bias noted in the article. Does the existence of this bias mean that CPI over/understates the cost of living? An example was that people are substituting VCRs and...

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106 ECO Assignment Taylor____ Name __Alexander Instructions: Read the posted article, Adjusting the Consumer Price Index by Schnepper (1996), then answer the following questions. (Make sure to type your answers!) 1. Provide an example of substitution bias noted in the article. Does the existence of this bias mean that CPI over/understates the cost of living? An example was that people are substituting VCRs and rentals for going to the movies, therefore the increased cost of going to the movies doesnt necessarily mean an increased cost of living. This bias means the CPI overstates the cost of living. 2. Provide an example of the infrequent introduction of new goods from the article. Does the fact that CPI very rarely is updated (hence the fixed basket of goods and services) mean that CPI over/understates the cost of living? An was example the introduction of a new better cheaper calculator. This bias makes the CPI overstate the cost of living. 3. Provide an example of a positive quality change from the article. Does the fact that CPI does not account for this positive quality change mean that CPI over/understates the cost of living? What would be the effect of a negative quality change? An example was refrigerators that use less electricity. The fact that the CPI doesnt account for the positive quality change makes it overstate the cost of living. A negative quality change would make the CPI understate the cost of living. 4. Which example in the article could be both a positive quality change and an example of substitution on the part of consumers? New drugs that replace surgery would be both an example of a positive quality change and a substitution.
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