A theory asserts that consumers will purchase less of a good at higher prices than they will at lower prices. However, when the average price of cars increased throughout the 1990s, more cars were purchased. Which of the following explanations of the apparent conflict between theory and data is most accurate?
A) The price and quantity data gathered by researchers was clearly measured incorrectly.
B) It is likely that variables other than the price and quantity of cars demanded were changing.
C) The ceteris paribus assumption is valid.
D) The theory must be invalid.

Question

Quizplus · Accepted Answer

The theory of demand applies the ceteris paribus assumption, which means that all other variables remain constant. In reality, there are many variables that influence consumer purchases such as income, taste, and availability of credit, which could all be changing alongside the price of cars. The increase in car purchases during the 1990s could be due to other variables that were changing simultaneously. Thus, the apparent conflict between theory and data can be explained by the presence of other variables.

A Theory Asserts That Consumers Will Purchase Less of a Good