Question

Suppose you are trying to understand the effect that an increase in the price of grapes will have on the market for wine.

An effective model to determine this effect is one that evaluates the change in the price of grapes on the market quantity of wine assuming:
a) buyers' incomes also change.
b) buyers' preferences and incomes also change.
c) some wines use different grapes.
d) no other change takes place.

Answer 1

The correct answer is option d.

Step-by-step explanation:

The most effective model to understand the effect of change of a variable on other variable is by assuming other factors to be constant. This simplifies the model and helps in easily understanding the relationship between the two variables.

Though the assumption of other things being constant does not apply in the real world, it is still used as otherwise change in other factors would complicate the model. If several factors change it would be difficult to understand the relationship between variables.

Here, to study the effect of change in the price of grapes on the market for wine, it is necessary to assume other factors such as income, consumer preferences, etc to be constant.