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.
Answer: D
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An increase in U.S. demand for Japanese made cars (made in Japan) would, other things equal, increase the U.S. financial account surplus
a. true b. false
The optimal amount of pollution abatement is such that
A) the total benefit of reducing pollution is equal to the total cost of reducing pollution. B) the marginal private cost of reducing pollution is just equal to the profit of the polluting firms. C) there is no remaining pollution. D) the marginal social cost of reducing pollution is just equal to the marginal social benefits from doing so. E) none of the above; there is no optimal amount of pollution abatement.