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) 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.
B) Surya is right; she has evidence to back her claim. The theory must be erroneous.
C) Surya is making the mistake of assuming that correlation implies causation.
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 2
What is the free-rider problem? Why do free riders make the private provision of a public good inefficient?
What will be an ideal response?
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