Economists in the Statistics Bureau decide to check the CPI substitution bias. To do so, they conduct a Consumer Expenditure Survey in both 2015 and 2016. Table 1 shows the results of the survey. It shows the items that consumers buy and their prices. The Statistics Bureau fixes the reference base year as 2015.

1. Calculate the CPI in 2016 if the CPI basket contains the 2015 quantities.

2. Calculate the CPI in 2016 if the CPI basket contains the 2016 quantities.

3. Is there any substitution bias in the CPI that uses the 2015 basket? Explain.

Transcribed Image Text:

TABLE 1 2015 2016 Item Quantity Price Quantity Price Broccoli 10 $3.00 15 $3.00 Carrots 15 $2.00 10 $4.00