Question

1. John is studying the effects of income on the demand for peppers. Which factors are held constant when using the "ceteris paribus" assumption?

income

all factors affecting demand, except income

all factors affecting demand, including income

none of the above

Only price could change the ceteris paribus. Change of income can affect demand. Do we disregard this in ceteris paribus?

2. If supply and demand shift simultaneously, the equilibrium price __________________.

• must decrease if the equilibrium quantity increases and must increase if the equilibrium quantity decreases.

• must increase if the equilibrium quantity increases and must decrease if the equilibrium quantity decreases.

• could decrease if the equilibrium quantity increases and could increase if the equilibrium quantity decreases.

• could increase if the equilibrium quantity increases and could decrease if the equilibrium quantity decreases.

Answer 1

a) Ceteris Paribus means all the other things being constant except the one we are considering, here, John is considering the effect of income on the demand that means if we use Ceteris paribus all the other variables like the quantity demanded, taste and preference, price of substitute etc will remain constant except the Income.

The answer is "All factors affecting the demand except the income."

b) yes, ceteris paribus keeps all the other variable that can change the demand as constant. It will include the price and other variables.

c) If the quantity is increasing it could be because of an increase in the supply, that will decrease the price and increase the demand that will decrease the supply. that means the price is indeterminate. The answer is "C", could decrease if the equilibrium quantity increases and could increase if the equilibrium quantity decreases. (if we have an option of multiple answer option D is also correct, if we go with supply curve shifting more than demand C will be right if Demand curve shifted more that the supply option D will be correct.)