Question: The Consumer Price Index (CPI) measures changes in the cost of living by comparing the cost of buying a certain bundle of goods and services

The Consumer Price Index (CPI) measures changes in the cost of living by comparing the cost of buying a certain bundle of goods and services over time. The quantities of each commodity remain the same from year to year but their prices change, so changes in the index reflect the weighted average of changes in the prices of goods and services. Explain how the behavior assumed in the CPI conflicts with the way consumers actually respond to price changes. Do you think the CPI overestimates or underestimates the effect of price changes on consumers?

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