Question

Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000miles. Ten years later, the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI would *

Answer 1

Answer:

Overestimate inflation between the two years.

Explanation:

If there is an increase in the cost of automobile tire and no adjustment is made in the mileage, and then CPI would be overestimated between the two years. This is because as there is no improvement in mileage and hence it is estimated that there is no increase in variable costs in the process of improving the quality.  

Therefore, the correct answer is overestimate inflation between the two years.