True or False: Because of substitution bias, we tend to overstate the average inflation rate during periods of rising prices. By a symmetrical argument, it follows that we tend to understate the average inflation rate during periods of falling prices. Explain.

The answer is false.
In the transparencies, I gave a simple example using consumption of chips and Doritos. Construct two sets of new prices so that one set shows generally rising prices and the other set shows generally falling prices. Make sure your numbers have Doritos being cheaper than chips in one year and chips cheaper than Doritos in the other (to induce a switch in quantities purchased). Now calculate the CPI inflation rate in each case and the cost of living change in each case. You will find that the CPI inflation rate is higher than the cost of living inflation rate in both cases.