Question

Which of the following statements about a cost-of-living index is true? (a) A typical index overstates the effects of a price change because it ignores substitution in response to relative price changes. (b) A "chained" index generally states the true effect of price changes more accurately than does a more traditional (fixed-weight) index. (c) A cost-of-living index based on the general population (e.g., the consumer price index, or CPI) accurately captures the effects of price changes on specific demographic groups (e.g., the elderly or college students). (d) Both (a) and (b) above (e) Both (a) and (c) above

Answer 1

1) :- a and b is right.

• both the index are based on same item index area which calculated by using geometric average .

• but many analytics consider chained CPI is more accurate measure the cost of living than traditional one.

• a substitution bias cause inflation which overstated the true rise in cost of living .

•Because it does not take into account that people can substitute away from good those price rise