' I o X Professors required each student to buy 10 te'xt':books,; regardllegs of the price. X (O Asthe price of energy drinks increased relative to the ' price of coffee between 2020 and 2022, studekts decreased their consumption of energy drinks and increased their consumption of coffee, v @ The quality of textbooks increased dramatically from 2020 to 2022, with textbook companies bundling new online study aids with their books, but this quality change is hard to measure. Points: @ 0.25/ 1 Explanation: Close Explanation ~ One reason that price indexes such as the UPI overstate inflation is that they use a fixed basket of goods. In reality, when the price of a good increases, people tend to buy less of it. For example, during the period shown in this problem, the price of energy drinks rose dramatically, but if the characteristics of all the goods were held constant, you would expect students to buy fewer energy drinks as a result. Therefore, a measure of inflation that assumes that students would not reduce their consumption of energy drinks, even as their price rose, would overstate inflation. However, if students cannot alter their bundle—for example, because professors require them to buy 10 textbooks, regardless of the price—then the UPI would be a more accurate description of the true cost of attending college. Another reason that price indexes overstate inflation is that they assume the quality of a good doesn't change from year to year. Therefore, if the price of something increases because of increases in quality, the price index might overstate the cost increase of that item due to unmeasured quality improvements. For example, it's reasonable to think that part of the price increase of the textbooks was payment for the new online study aids, not an increase in the price of the same textbooks that were sold in 2020. Yet another reason that price indexes overstate inflation is that they don't account for the benefits of new goods. When new goods, like new motor scooters, are introduced, consumers can spend their money on more things. As a result, the value of each dollar they have increases. ! Because the UPI doesn't account for new goods, it underestimates what a dollar is worth when new goods are introduced and, thus, overestimates inflation. Try Another Version SRR SR S R S A B A
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