An economist at the University of Alaska at Anchorage has been asked to explain why the price of Alaskan crude oil has fallen recently. In order to develop a model, the professor should take which steps?
A) Identify the problem, develop a model based on simplifying assumptions and test the model to formulate a conclusion.
B) Gather data on crude oil prices and seemingly unrelated variables to look for associations, then formulate a hypothesis based on those unexpected associations.
C) Ask people in Alaska why they are not purchasing oil.
D) None of these. The oil industry is controlled by a cartel; therefore price changes in the industry cannot be explained using economic theories.

Question

Quizplus · Accepted Answer

The best approach is to identify the problem, develop a model based on simplifying assumptions, and test the model to formulate a conclusion. This approach is based on the scientific method and is commonly used in economics to understand market outcomes. Gathering data on unrelated variables or asking people why they are not purchasing oil may not provide a clear explanation for why the price of Alaskan crude oil has fallen. The idea that the oil industry is controlled by a cartel is a conspiracy theory and not based on economic theory or evidence.

An Economist at the University of Alaska at Anchorage Has