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CA Foundation · Quantitative Aptitude · Index Numbers

A cost of living index based on a base year basket continues to use the same fixed weights even after consumers have shifted heavily from product A to cheaper product B. Which problem does this chiefly illustrate?

This illustrates outdated weights. A fixed base year basket ignores consumers' substitution towards cheaper goods, so the index tends to overstate the rise in the cost of living. The problem lies in the fixed weighting, not in sampling, averaging method or the circular test.

  1. AThe weights become outdated, so the index may overstate the rise in cost of livingCorrect
  2. BSampling error caused by choosing too few shops
  3. CError from using the wrong averaging method for relatives
  4. DFailure of the circular test for the chosen base year

Explanation

A Laspeyres-type index with fixed base year quantities ignores substitution. When consumers move to cheaper goods, the fixed basket no longer reflects actual spending, so the index tends to overstate the rise in living cost. The issue is outdated weights, not sampling or averaging.

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