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.

Question

Quizplus · Accepted Answer

Surya may be overlooking some factors that could have contributed to the decrease in sales such as changes in income, consumer preferences, or competition. These are called omitted variables, and if they are not controlled for, they can lead to incorrect conclusions. Therefore, it is possible that the decrease in demand led to a decrease in prices, rather than the other way around.

You Explain to Your Roommate Surya, Who Makes Beaded Headbands