Why is a Laspeyres price index often said to overstate the rise in the cost of living?

Correct answer: A) It assumes the base period basket is still bought, ignoring consumers switching towards goods whose prices have risen relatively less

Explanation

Laspeyres keeps base period quantities fixed. In practice, consumers substitute away from items that have become relatively more expensive. Because the index does not reflect this substitution, it tends to overstate the increase in the cost of maintaining living standards. Paasche tends to understate it.