You Explain to Your Roommate Surya, Who Makes Beaded Headbands

question 163

Multiple Choice

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)Surya is right; she has evidence to back her claim. The theory must be erroneous.
• B)Surya is making the mistake of assuming that correlation implies causation.
• C)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.
• D)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.

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Definitions:

Diseconomies of Scale

An economic concept referring to a situation where, as a firm expands, the costs per unit increase.

Long-Run Average Total Cost Curve

A graphical representation that shows the lowest average total cost at which a firm can produce any given level of output in the long run, where all inputs are variable.

Downward-Sloping

A term often used in economics to describe a curve or line that represents a decrease in one variable as another increases, typical in demand curves.

Long Run

A period in which all factors of production and costs are variable, allowing for adjustment to changes.