Author Question: The new goods bias puts a downward bias into the CPI and its measure of the inflation rate. Is the ... (Read 88 times)

Engineer · **on:** Jun 29, 2018

The new goods bias puts a downward bias into the CPI and its measure of the inflation rate. Is the previous sentence correct or not? Explain your answer.

What will be an ideal response?

Question 2

As Goldilocks consumes more gummy bears, her total utility ________ and her marginal utility from gummy bears ________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

heyhey123 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The sentence is false because the new goods bias puts an upward bias into the CPI and its measure of the inflation rate. The new goods bias occurs when new, higher quality and more expensive goods replace older, lower quality and less expensive goods. Part of the expense of the new goods is to pay for the higher quality of the new goods. But, if the price is not adjusted (downward) to take account of the higher quality, incorporating the new good into the CPI leads to an upward bias in the prices that go to make up the CPI and hence also an upward bias in the inflation rate.

Answer to Question 2

B