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# The Consumer Price Index(CPI) is a statistic that measures

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GMAT Club Legend
Joined: 15 Dec 2003
Posts: 4288
The Consumer Price Index(CPI) is a statistic that measures [#permalink]

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12 Jun 2004, 21:39
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The Consumer Price Index(CPI) is a statistic that measures changes in prices of goods and services purchased by consumers. It is based on a "basked of goods and services" divided into seven categories such as housing, food, and transportation with each category weighted according to its relative impact on a typical budget. Although the CPI is a useful measure of inflation, consumers themselves almost always imagine that prices are rising faster than this statistical measure.

Which of the following would help to explain the phenomenon described above?
A) the typical consumer purchases large ticket items such as a house or a car so infrequently that even given a low rate of inflation, the price of the new purchase will be noticeably higher than that of the previous one
B) in recent years, advances in technology have caused the price of electronics such as computers and stereo equipment to decline even as new products are introduced that have more extensive capabilities
C) because of long-term pressures in the health-care sector such as the push for higher wages for the lowest paid health-care workers, the cost of medical care has risen faster than the CPI
D) the CPI is compiled by the Bureau of Labor Statistics and is intended primarily as a measure of the effect of rising prices on a typical urban family
E) the prices paid for commodities such as gasoline that depend upon international market conditions are usually more volatile than those determined largely by domestic factors and tend to rise and fall sharply in the short run
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Best Regards,

Paul

SVP
Joined: 30 Oct 2003
Posts: 1790
Location: NewJersey USA

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12 Jun 2004, 22:11
I liked (A). It talks about perception of a typical consumer.
Director
Joined: 05 May 2004
Posts: 574
Location: San Jose, CA

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13 Jun 2004, 01:27
I will go with A
The CPI is a function of large and small ticket items and a typical cutomer normally buys small ticket items most of the time. Hence, even though there might be inflation in small ticket items - the overall CPI might be fathomed by the wts of large ticket items
Director
Joined: 01 Feb 2003
Posts: 844

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13 Jun 2004, 02:10
Agree with (A)

the rest of the options are too specific
Manager
Joined: 02 Jun 2004
Posts: 184
Location: Kiev, Ukraine

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13 Jun 2004, 03:21
I also agree with A.

The phenomenon at hand is the discrepancy between the objectivity of the CPI and consumer's perceptions of prices rising more quicly than reflected by the CPI.

CPI reflects inflation based on weighing of large & small items in attempting objectivity.

Consumers, being subjective, tend to care about high prices only when they are really noticeable, when purchasing a house, a car, etc. It's likely they are not going to notice a decrease/increase in price of toilet paper!
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GMAT Club Legend
Joined: 15 Dec 2003
Posts: 4288

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13 Jun 2004, 22:03
OA is A
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Best Regards,

Paul

13 Jun 2004, 22:03
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