Question

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.

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The Consumer Price Index represents the cost of a basket of goods purchased by consumer in the present (current year) in relation to the cost of the basket in the base year.

Weight, which represents the importance of the good to the consumer and are fixed, are assigned to every good in the basket. Consumers will change their purchases from year to year in order to give more weight to goods whose prices have been lowered, and vice versa.

The CPICPI is going to give too much weight to goods whose prices have increased and vice versa.

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