Dave Richardson wrote, > Presumably they are better off with their actual purchases than > by continuing with their previous pattern of purchasing equal quantities of > each. I didn't intend my example to say anything about the standard of living of consumers. I understood your theoretical explanation to be: as relative prices fall, consumers shift to LOWER priced goods. Therefore, the CPI is biased upwards as it does NOT take into account the shift to lower priced goods (but assumes a fixed commodity bundle). I was merely addressing the claim that a shift based on a fall in relative prices meant that consumers shifted to LOWER priced goods. A fall in relative prices can just as well cause a shift to HIGHER priced goods. I wasn't concerned with the "welfare" impact of shifts based on changes in relative prices but whether the CPI overstated the prices consumers paid in the marketplace (based on their actual purchases). In any case, I'm not sure you can say anything about the impact of an exogenous change in relative prices on welfare. It's true that consumers are better off by responding to changes in relative prices than by not responding. But that doesn't mean the post-response welfare is greater than the initial (before relative price change) welfare level. Eric (neoclassical economist for a day)
