Deck 21: Thinking Like a Modern Economist

Question 1

Do the assumptions of a model have to accurately describe behavior for the model to be useful? Explain.

Answer 1

Not necessarily. Sometimes models that accurately describe behavior do not offer any better insights. The text gives the example of a professional pool player: she may not know the mathematics necessary to calculate her best shot, but assuming that she does is helpful in determining which shot she will make.

Question 2

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

Answer 2

Economic models can be structured verbally, graphically, or algebraically.

Question 3

What is the endowment effect? How do behavioral economists explain the existence of this phenomenon?

Answer 3

The endowment effect is a phenomenon that causes people to value something more simply because they already have it. Behavioral economists focus on the evolutionary helpfulness of this effect; if people tend to value things more when they have them (and conversely, less when they don't), this would reduce social conflict because people would tend, on average, to be more satisfied with the things they have then the things they don't, all else equal.

Question 4

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 5

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

Question 6

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

Question 7

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 8

What is econometrics?

Question 9

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

Question 10

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?

Question 11

Give an example of predictably irrational behavior.

Question 12

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

Question 13

What is an empirical model? What is its usefulness?

Question 14

What is a regression model? How do you interpret the worth of a regression model?

Question 15

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

Question 16

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

Question 17

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 18

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

Question 19

What does your author mean when he says that the human mind is a fast pattern completer?

Question 20

What are the limits of heuristic models?

Question 21

What does your author mean when he says that there is a tradeoff between simplicity and completeness?

Question 22

How do traditional and behavioral economists differ in their opinions about whether households are saving enough?

Question 23

Give four examples of complicated modern formal models that are usable due to advances in mathematics and computing, and give a brief description of each.

Question 24

How do traditional and behavioral economists differ in their opinions about economic growth?

Question 25

How do traditional and behavioral economists differ in their opinions about whether the government should have done something to stop the housing bubble in the early 2000s?

Question 26

How does the empirical testing of formal models "reverse" the process of heuristic empirical modeling?

Question 27

Suppose you were suspicious that shorter people lived longer lives, how would you go about testing this hypothesis? What kind of model would you need to use? How would you determine whether height was related to longevity? What are the potential shortcomings of your analysis?

Question 28

What is a natural experiment? Why do economists rely on natural experiments?

Question 29

What are two different kinds of equilibria that would have been difficult for early economists to analyze but are possible to analyze today because of advances in mathematics and computing?

Question 30

Do economic models lead directly to theorems or to precepts? Why or why not?