Question

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:

a. has confused association and causation.
b. cannot test his theory because his observations violate the ceteris paribus assumption.
c. used normative economics to answer a positive question.
d. built a model with too many variables.

Answer 1

Answer:

b. cannot test his theory because his observations violate the ceteris paribus assumption

Explanation:

As per the law of supply, when price of an input rises, quantity supplied of a good falls, keeping other factors affecting supply as constant (ceteris paribus).

Leather and Shoes are complimentary goods in the sense that leather serves as an input for the product i.e shoes. So if the price of leather rises, production of shoes would fall, keeping other factors constant.

When the price of an input rises, the quantity supplied falls, keeping other factors affecting supply as constant.

In the given case, the price of inputs has increased and yet the production of shoes has increased owing to an advancement in the technology. Technology is a different determinant of quantity supplied and considered as an other factor affecting supply.