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.