You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices. She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya?

a. I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes m Income.

b. I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices.

c. Surya is right; she has evidence to back her claim. The theory must be erroneous.

d. Surya is making the mistake of assuming that correlation implies causation.

Question

Business

Jameson Jones

2 January, 04:54

You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices. She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya?

a. I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes m Income.

b. I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices.

c. Surya is right; she has evidence to back her claim. The theory must be erroneous.

d. Surya is making the mistake of assuming that correlation implies causation.

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Answers (1)

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Morgan Gordon · Answer 1

The correct answer is letter "A": I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income.

Explanation:

What Surya's roommate is trying to explain to her is the demand law. According to the demand law as long as the price of a good or service decreases the quantity demanded increases and vice versa. However, prices may not be the only factor that influences the quantity demanded. A product's quality, advertising, consumer's income and trends can also influence the quantity demanded for products. The latter are called omitted variables.