You explain to your friend, Hanaa (who runs a catering service) about an economic theory asserts that consumers will purchase less of a product at higher prices than they will at lower prices. She contends that the theory is incorrect because over the past two years she has raised the price of her catered meals and yet has seen a brisk increase in sales. How would you respond to Hanaa?
A) Hanaa is making the mistake of assuming that correlation implies causation.
B) I will explain to her that there are some omitted variables that have contributed to an increase in her sales such as changes in income.
C) Hanaa is right; she has evidence to back her claim. The theory must be erroneous.
D) I will explain to her that she is making the error of reverse causality: it is the increase in demand that has enabled her to raise her prices.

Question

Quizplus · Accepted Answer

There may be other factors, such as increased income or changes in consumer preferences, that have led to an increase in sales despite the price increase.

You Explain to Your Friend, Hanaa (Who Runs a Catering