Which of the following would be a consequence of substitution bias in the CPI?
A) Social Security payments would not adequately compensate retired workers for inflation.
B) Businesses would overcompensate employees for inflation when giving cost of living raises.
C) The inflation rate based on the CPI would underestimate the true level of inflation.
D) Judges would award child support payments that would not adequately keep up with the true cost of inflation.
Answer: B
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According to William Niskanen's model of bureaucracy, Congress tends to approve a bureau's budget at a level where
a. the marginal value of the last unit of the bureau's output is greater than the marginal cost. b. the marginal cost of the last unit of the bureau's output is greater than the marginal value. c. the marginal value of the last unit of the bureau's output equals the marginal cost. d. the marginal cost of the last unit of the bureau's output is zero.
The goal of an economist who formulates new theories is to
a. provide an interesting framework of analysis, whether or not the framework turns out to be of much use in understanding how the world works. b. provoke stimulating debate in scientific journals. c. contribute to an understanding of how the world works. d. demonstrate that economists, like other scientists, can formulate testable theories.