Deck 21: Thinking Like a Modern Economist

Question 1

An economist builds a model by beginning with certain self-evident principles and then derives the implications of that model. What approach is this economist taking?

A)Inductive
B)Deductive
C)Apophatic
D)Experimental

Answer 1

Deductive

Question 2

A ________ is a simplified representation of a problem that captures the essential issues.

A)precept
B)theorem
C)hypothesis
D)model

Answer 2

model

Question 3

Traditional economic models highlight social dimensions of economic problems.

Answer 3

False

Question 4

Which type of economists rely on the widest array of models?

A)Traditional
B)Keynesian
C)Modern
D)Formal

Question 5

The more complex a model is, the easier it is to arrive at a conclusion.

Question 6

What distinguishes economists from other scientists?

A)Economists see the world through a lens of incentives; other scientists focus on other aspects of the world.
B)Economists use models; other scientists build scaled-down replicas of what they are studying.
C)Economists use regression models; other scientists use only correlations among variables.
D)Economists focus more on policy issues compared with other scientists.

Question 7

Assuming that people follow enlightened self-interest allows behavioral economists to create a single clear-cut model that can be applied across many different contexts.

Question 8

The smaller the coefficient of determination, the better the chance of every point being on the "best fit" line.

Question 9

What distinguishes scientific from engineering models?

A)Scientific models are likely to be more useful than engineering models.
B)Scientific models require mathematics, whereas engineering models do not.
C)Scientific models rely on assumptions, whereas engineering models do not.
D)Scientific models focus on understanding, whereas engineering models focus on policy.

Question 10

What is the glue that holds modern economics together?

A)The supply and demand model
B)The economic decision rule
C)Modeling
D)The invisible hand theorem

Question 11

If an economist wanted to understand why people don't buy life insurance, he would want to use the deductive approach.

Question 12

Traditional economists prefer simpler models because they give clear-cut results that can better highlight certain important insights.

Question 13

Behavioral economists believe in modifying the assumption that people are rational and follow their own self-interest.

Question 14

Behavioral economists attempt to take into account predictably irrational behavior.

Question 15

Modern traditional economics relies on complex models that are easy to test in real life.

Question 16

Science is justified through heuristic models.

Question 17

Traditional models see no role for the government in pushing individuals toward the preferred equilibrium.

Question 18

The endowment effect is used to describe the mistake a consumer makes when he or she accounts for the monetary costs of his or her decisions but ignores the nonmonetary opportunity costs.

Question 19

What distinguishes a deductive approach from an inductive approach to modeling?

A)An inductive approach begins by looking at the data, whereas a deductive approach develops the implications of a model first.
B)Inductive modeling uses data, whereas deductive modeling does not.
C)The deductive approach begins by looking at the data, whereas the inductive approach begins with the model.
D)The inductive approach does not have conclusions for viable policies, whereas the deductive approach does.

Question 20

The assumptions that form the basis of any economic model are referred to as:

A)theorems.
B)precepts.
C)building blocks.
D)objectives.

Question 21

An economist observes that a pharmaceutical company is sponsoring a diabetes clinic and providing free medications. She concludes that the pharmaceutical company is concerned not only about profits but also about fair distribution of drugs to those who need them. This economist is most likely a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 22

All economists believe that:

A)people are selfish.
B)incentives are important.
C)people follow principles of enlightened self-interest.
D)assumptions are irrelevant to the outcome of a model.

Question 23

A supply and demand model is a:

A)path-dependent model.
B)model that considers only important feedback effects.
C)model that considers all feedback effects.
D)model that does not consider feedback effects.

Question 24

To decide what is meant by enlightened self-interest, behavioral economists will:

A)make their models more mathematically rigorous.
B)use the ceteris paribus assumption repeatedly.
C)use laboratory and field experiments.
D)base their models on induction.

Question 25

Say that Janie is exhibiting the endowment effect as she makes a decision. She is:

A)deciding on the basis of sunk costs.
B)valuing what she already has more because she owns it.
C)consuming on the basis of endorsements by celebrities.
D)buying something she can't really afford right now because she expects to have savings in the future.

Question 26

Two economists are arguing about how to approach a problem. The first economist says, "Look, I can see in the data that consumption rises when income rises. We need to build a model with an equation that relates the two." The second economist responds, "I can see that is the case, but we have to understand why that is true before we build any equations, and then we will see what the model says about the relationship between the two." What kind of economist is the second one likely to be?

A)A traditional economist
B)A behavioral economist
C)An irrational economist
D)An engineering economist

Question 27

What two assumptions are traditional economists more likely to make compared to behavioral economists?

A)Incentives are important, and people base decisions on the economic decision rule.
B)Purposeful behavior and predictable irrationality.
C)Rationality and self-interest.
D)Not all information is available, and the invisible hand is efficient.

Question 28

Warren Buffett feared gaining weight. To keep himself from eating too much, he gave unsigned checks for $10,000 to his children, promising to sign them if he exceeded his desired weight by a certain date. This is an example of:

A)an abductive decision.
B)sunk costs.
C)an inductive decision.
D)a precommitment strategy.

Question 29

An economist observes that a monopolist does not take full advantage of its market power. She concludes that there must be some rational reason for this behavior that she has not yet discovered. This economist is most likely to be a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 30

Behavioral economists want to:

A)eliminate the supply and demand model.
B)eliminate heuristic models.
C)eliminate traditional economic building blocks.
D)maintain supply and demand models.

Question 31

For me to stop getting speeding tickets for a year, I gave five friends devices that measure my driving speed. If I drove over the speed limit by more than 5 miles per hour, I would have to pay them each $1,000. This would be an example of:

A)a deductive decision.
B)opportunity costs.
C)a precommitment strategy.
D)sunk costs.

Question 32

When Williams-Sonoma introduced its first bread baker at $200, sales were low. But when it decided to offer a fancier $300 version, sales of the $200 bread baker rose tremendously. An economist concluded that consumers needed another bread baker for comparison to decide whether the $200 bread baker was a deal. This economist is likely to be a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 33

Andy is offered the following two income scenarios: (1)earn $10,000 the first year, $12,000 the second year, and $15,000 the third year or (2)earn $15,000 the first year, $12,000 the second year, and $10,000 the third year. Which is the rational option?

A)Option 1
B)Option 2
C)Neither even though option 2 is better than option 1.
D)Neither; the options are the same.

Question 34

An economist observes that a monopolist does not take full advantage of its market power. She concludes that the firm may not do so because it might not be fair. This economist is most likely to be a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 35

If you are carrying out purposeful behavior, you are:

A)making completely irrational judgments.
B)using reflection and making reasoned judgments.
C)completely rational.
D)a heuristic individual.

Question 36

Heuristic models are:

A)highly mathematical models that are impossible to solve.
B)based on scattergrams of two variables.
C)models expressed informally by graphs.
D)models expressed informally in words.

Question 37

An economist observes that a pharmaceutical company is sponsoring a diabetes clinic and providing free medications. She concludes that the pharmaceutical company is reducing short-term profits for the possibility of higher long-term profits. This economist is most likely a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 38

After a hurricane, several gas stations decide to keep their gas prices at the prehurricane level. An economist who most likely believes that there has to be some rational reason for this behavior is more than likely a(n):

A)irrational economist.
B)Keynesian economist.
C)traditional economist.
D)engineering economist.

Question 39

An economist who is most likely to believe that people will never find $200 lying on the street is referred to as:

A)a modern economist.
B)a mathematical economist.
C)an engineering economist.
D)a traditional economist.

Question 40

An economist looks at data that suggests that people are making decisions that are based on rules of thumb. She concludes that people tend to make decisions that are based on habit and not on the economic decision rule. She is most likely a(n):

A)traditional economist.
B)behavioral economist.
C)irrational economist.
D)engineering economist.

Question 41

Models that that require knowledge of the relevant history to reach a conclusion are referred to as:

A)codependent models.
B)deductive models.
C)mathematical models.
D)path-dependent models.

Question 42

Scientists are very hesitant to base any knowledge on heuristic models because:

A)they do not contain any implications for government policy and influencing choice.
B)it is easy to believe a story and make sense of it within its own frame.
C)they only use the deductive approach.
D)they contain too many equilibria.

Question 43

Economists who use supply/demand models:

A)support the free market.
B)oppose the free market.
C)could support or oppose the free market.
D)generally oppose the free market.

Question 44

To allow heuristic models to provide us with a better understanding of economic problems, it is important to:

A)increase the amount of vocabulary in your model.
B)always stick with the deductive method.
C)empirically test your data.
D)never bring mathematics into the model.

Question 45

When it is impossible to carry out a controlled experiment, economists often turn to a:

A)natural experiment.
B)precommitment strategy.
C)self-confirming equilibrium.
D)irrational behavior.

Question 46

Being able to find stable patterns in data means that empirical models can be labeled as:

A)butterfly effect models.
B)heuristic models.
C)pattern-finding models.
D)traditional models.

Question 47

"Letting the data speak" in economics refers to:

A)using a layperson's terms in publications to explain your findings.
B)collecting and analyzing data with econometric tools.
C)focusing only on the heuristic model.
D)using only deductive reasoning.

Question 48

Behavioral economists support:

A)eliminating the basic building blocks.
B)eliminating graphs.
C)eliminating the supply and demand model.
D)maintaining the basic models.

Question 49

If people start to buy more expensive fuel-efficient cars rather than cheaper SUVs, even though the additional cost of fuel-efficient cars is greater than the savings in gas over the life of the car, this would be explained by which of the following types of models?

A)Heuristic models using traditional building blocks
B)Heuristic models using behavioral building blocks
C)Empirical models using regression analysis
D)Path-dependent models

Question 50

Until the 1940s economics tended to focus on deductive reasoning. This can be attributed to the:

A)lack of computational power to analyze data.
B)laissez-faire approach to the economy.
C)fact that inductive reasoning was viewed as obsolete.
D)lack of quality economists.

Question 51

If a model assumes that people take into account other people's interests, it is probably a:

A)traditional model.
B)heuristic model.
C)behavioral model.
D)natural model.

Question 52

A model that statistically discovers a pattern in the data is called a(n)________ model.

A)heuristic
B)traditional
C)empirical
D)butterfly effect

Question 53

The statistical analysis of economic data is referred to as:

A)microeconomics.
B)econometrics.
C)deductive reasoning.
D)calculus.

Question 54

If a teacher was curious to see if collaboration among students leads to higher grades, which of the following models would be the best to use?

A)Traditional models
B)Heuristic models
C)Regression models
D)Butterfly effect model

Question 55

Relying on experiments and statistical analysis of real-world observations is the premise behind:

A)heuristic economics.
B)traditional economics.
C)modern economics.
D)Keynesian economics.

Question 56

Which of the following models is best able to incorporate significant amounts of data?

A)Traditional
B)Heuristic
C)Regression
D)Butterfly effect

Question 57

The primary problem with heuristic models is that:

A)they are too deductive.
B)it is hard to test their validity.
C)they do not include enough mathematics.
D)they are not very convincing.

Question 58

A behavioral economist:

A)assumes that people are always irrational.
B)tends to use heuristic models.
C)uses models that assume that people are purposeful rather than rational.
D)uses models that assumes that people are rational rather than purposeful.

Question 59

Which of the following would not be part of the empirical approach when studying such questions as "Has abortion led to a decrease in the crime rate?"

A)Looking at the data
B)Creating informal models and hypotheses
C)Using deductive reasoning
D)Using models to structure the empirical study

Question 60

The supply and demand model is the workhorse of the principles of economics because it:

A)is a useful model by which students can be introduced to economic reasoning.
B)is a perfect model and can never be improved upon.
C)does not have to have any empirical testing to back up the results of the model.
D)follows directly from the inductive approach to economics.

Question 61

What is the difference between the purposes of a scientific model and an engineering model?

Question 62

The main advantage that ACE models have over other models is that:

A)economists do not have to "solve" the model on their own.
B)they look only at single equilibrium outcomes.
C)they eliminate the importance of mathematics.
D)they primarily use deductive methods.

Question 63

Suppose people believe that prices will continue to fall in the future, and so they put off buying things now. As a result, prices fall. In economics we refer to this as a(n):

A)Nash equilibrium.
B)endowment effect.
C)self-confirming equilibrium.
D)precommitment strategy.

Question 64

When modern economists cannot solve a model analytically, they can estimate the solution by:

A)abandoning models altogether.
B)changing from the inductive back to the deductive approach.
C)simulating the model with a computer to arrive at a numerical solution.
D)using induction to solve a series of equations.

Question 65

The idea that small changes can render behavior or another complex system completely unpredictable is referred to as the:

A)heuristic model.
B)path-dependent model.
C)butterfly effect model.
D)regression model.

Question 66

"The problem of getting people to buy car insurance is best solved by the market." This belief belongs to which type of economist?

A)Behavioral
B)Traditional
C)Modern
D)Keynesian

Question 67

If behavioral economists do not believe that people are rational,what do they believe? Do behavioral economists believe that people are irrational?

Question 68

Are modern economists unified in their prescriptions for government policy? Do behavioral economists and traditional economists generally agree or disagree on government policy?

Question 69

What are heuristic models? Do they help us understand the world around us? What are their limits?

Question 70

Which of the following views most likely would belong to a behavioral economist?

A)Governments should never intervene in a housing bubble.
B)When people spend too much, they are just reflecting their wants.
C)Change the institutional structure to get people to save more.
D)More growth is needed to make society better off.

Question 71

In behavioral economics people gravitate toward certain points. These points are called:

A)path-dependent points.
B)best fit points.
C)anchor points.
D)feedback points.

Question 72

What is a game theory model? Give two examples of decisions by households or businesses that you think might be appropriately analyzed using game theory models.Give two examples of decisions by households or businesses for which the use of a game theory model might not be necessary.What is the harm of using a game theory model where it is not necessary?

Question 73

Is following a rule-of-thumb rational? Can it ever be rational to be irrational?

Question 74

Give an example of predictably irrational behavior.

Question 75

Have all modern economists given up the use of the traditional building blocks? Why or why not?

Question 76

Give an example of two different sets of assumptions that could underlie different economic models.

Question 77

How do the traditional building blocks differ from the behavioral building blocks? What similarities do they have? What are the advantages and disadvantages of each set of building blocks?

Question 78

What are the three most common structures that economic models have?

Question 79

Suppose a person buys only fruits and vegetables while at the grocery store,even though he or she hates fruits and vegetables and would much rather eat junk food.Much of the produce goes bad before it is consumed and must be thrown out.What name is given to this kind of behavior? Is it rational?

Question 80

In your text,the author says,"Data,by themselves,have no meaning;they have to be interpreted and given meaning,and how one interprets the data depends on the model and the building blocks one has in one's mind." What does he mean by this? What does this say about the relationship between empirical and formal models?