Suppose an economist tests the theory that when the price of leather increases, fewer pairs of shoes are produced. He observes more shoes being produced when the price of leather increases. At the same time, a new production technology allowed for more shoes to be produced in less time. He has
A. confused association and causation.
B. misunderstood the Ceteris paribus assumption.
C. used normative economics to answer a positive question.
D. built an untestable model.
Answer: B
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If a firm’s fixed costs increase, then profits drop but its output should not change.
Answer the following statement true (T) or false (F)
What is another name for a vertical line that shows the long-run aggregate supply in the aggregate demand and aggregate supply model?
a. Real GDP b. Equilibrium GDP c. Potential GDP d. Long-run aggregate demand
Define collusion
Supply-side policy is designed to
A. Shift the production possibilities curve outward and shift the long-run aggregate supply curve to the right. B. Shift the production possibilities curve outward and shift the aggregate supply curve to the left. C. Move the economy from a point inside the production possibilities curve to a point on the curve and shift the aggregate supply curve to the right. D. Move the economy from a point inside the production possibilities curve to a point on the curve and shift the aggregate supply curve to the left.