Question

EXERCISE 2.2 USING CETERIS PARIBUS

Suppose you build a model of the market for umbrellas, in which the predicted number of umbrellas sold by a shop depends on their colour and price, ceteris paribus.

1.   The colour and the price are variables used to predict sales. Which other variables are being held constant?

Which of the following questions do you think this model might be able to answer? In each case, suggest improvements to the model that might help you to answer the question.

2.   Why are annual umbrella sales higher in the capital city than in other towns?

3.   Why are annual umbrella sales higher in some shops in the capital city than others?

4.   Why have weekly umbrella sales in the capital city risen over the last six months?

Answer 1

1. The model that is built in the question is Q= f(colour, price). The author keeps all the other things as ceteris paribus which means constant. So othe other variables that are held constant can be income of the buyer, price of substitute (rain coat), geographical location, quality of product etc.

The above mentioned model is Q= f(colour, price) can be used to answer a couple of question given below.

1. Coming to the question- Why are annual umbrella sales higher in the capital city than in other towns?

Ans) This question can partially be answered by the price component. It can be assumed that the prices are lowest in the capital city than any other city and hence the sales is higher in capital city. But the model could have be improved.   

1. Why are annual umbrella sales higher in some shops in the capital city than others?

Ans) This question can be answered using both the independent variables (price, colour) of the model. Some shops me have higher sale than others because of the low price and due to variety of colours available there. Since, the quantity demanded depends positively on both the variables this can be highly possible.

Here the model could have been improved by adding the variable locality. In which locality the shop is present also effects the sales of a shop. If it a main locality then the sales will mostly be high.

1. Why have weekly umbrella sales in the capital city risen over the last six months?

Ans) This question can be answered by using the variable price. It can be assumed that the prices has decreased over the course of 6 months and hence the demand increased leading to increase in sales.

This model could have been improved by adding the variable income of the buyer. If the income of the buyer increases then the demand increase hence the sales would increase.