Question

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The price of computers has fallen substantially over the past two decades. Use this drop in price to explain why the Consumer Price Index is likely to overstate substantially the cost-of-living index for individuals who use computers intensively. The Consumer Price Index (CPI) is likely to overstate substantially the cost-of-living index for individuals who use computers intensively because O A. the CPI uses a weighting system that gives less weight to goods whose prices have risen and more weight to goods whose prices have fallen OB. the CPI uses fixed weights that do not account for increased purchases of goods whose prices have fallen. O C. the CPI compares the cost of current purchases at current-year prices with the cost of current purchases at base-year prices, which were higher for computers. OD. the CPI allows consumers to purchase more of goods whose price has fallen, increasing total consumer expenditures. O E. the CPI allows consumers to purchase more of goods whose price has fallen but not to purchase less of goods whose price has risen.

Answer 1

Ans - B) The CPI uses fixed weights that do not account for increases purchases of goods whose price have fallen.

Explanation:

For non-typical individuals who use computers intensively, the fixed weight for computers in the basket will understate the importance of this good, and will hence understate the effect of the fall in the price of computers for these individuals. The CPI will overstate the rise in the cost of living for this type of individual