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Use the following table to answer the question. The table shows the prices and the quantities consumed in Vegetarian Country. Suppose the base year is 2020. Also, suppose that 2020 is the year the typical consumption basket was determined, so the quantities consumed in 2020 are the only quantities needed to calculate the CPI in each year.
| Year | Price of Carrots | Quantity of Carrots | Price of Celery | Quantity of Celery |
| 2020 | $2.00 | 100 | $1.00 | 100 |
| 2021 | 2.50 | 90 | 0.90 | 120 |
| 2022 | 2.75 | 105 | 1.00 | 130 |
The table shows that the 2021 inflation rate is biased upward because of _______.
ANSWER:
he correct answer is c. substitution bias.
Substitution bias occurs when the CPI fails to account for changes in consumer behavior in response to price changes. In this case, the CPI is calculated based on the quantities consumed in the base year (2020). If the price of carrots increases, consumers might substitute carrots with celery, but the CPI calculation assumes the basket remains the same as in the base year, which can lead to an overstatement of the cost of living.
In the data given, the quantities of carrots and celery consumed change between years, and the CPI does not reflect these changes in consumption patterns, leading to potential substitution bias.
