Question 1

On what basis is the best test of an economic theory?
A) on the accuracy of its assumptions
B) on the rigour of its mathematical formulation
C) on the ability of it to explain and predict
D) on the level of real-world detail it captures

Accepted Answer

The best test of an economic theory is on its ability to explain and predict real-world phenomena. While accuracy of assumptions and mathematical formulation are important, they are not sufficient if the theory cannot accurately explain and predict real-world behavior. The level of real-world detail captured is also important, but again, only as it relates to the theory's ability to accurately explain and predict.

Question 2

How is an economic theory tested?
A) by assessing the realism of its assumptions
B) by comparing and contrasting its simplicity with related theories
C) by comparing its predictions with real-world observations
D) by polling economists to see if there is consensus as to the validity of the hypothesis

Accepted Answer

Economic theories are tested by comparing their predictions with real-world observations. This process involves gathering data, analyzing it, and evaluating whether the theory accurately reflects the observations. The closer the theory's predictions match the real-world outcomes, the stronger the theory's validity. Assessing the realism of assumptions is important, but it is not sufficient to test an economic theory. Similarly, comparing the simplicity of economic theories does not determine their accuracy or validity. Polling economists is also not a reliable method for testing an economic theory, as consensus among experts does not necessarily equate to empirical validation.

Question 3

Why is economics different from a "hard" science like physics?
A) Economists cannot easily control all the variables that might influence human behaviour.
B) Economists have to control fewer variables than what is found in a physics experiment.
C) Economic experiments are easier to conduct than those in physics.
D) Economists abstract from reality in creating their theories.

Accepted Answer

Economics deals with complex human behavior and social systems, making it difficult to control all influencing variables, unlike controlled experiments in physics.

Question 4

Which of the following statements describing the relationship between theory and hypothesis is most accurate?
A) A hypothesis is a theory whose formulation relies on mathematics.
B) A theory may result from a tested and confirmed hypothesis.
C) "Theory" and "hypothesis" are interchangeable terms meaning the same thing.
D) A hypothesis may result from a tested and confirmed theory.

Accepted Answer

A hypothesis is a testable prediction or explanation for a phenomenon. It is usually formulated based on prior knowledge or observations, and it is tested through experimentation. If a hypothesis is consistently supported by evidence, it may become a theory, which is a larger, more comprehensive explanation or framework that can account for related phenomena. Therefore, a theory may result from a tested and confirmed hypothesis.

Question 5

Which of the following statements about testing an economic hypothesis is the most accurate?
A) It can be tested using empirical analysis.
B) It can be tested using normative analysis.
C) It cannot be tested since it is normative in nature.
D) It cannot be tested since it is a positive economic statement.

Accepted Answer

Economic hypotheses can be tested using empirical analysis, which involves collecting and analyzing data to evaluate the validity of a hypothesis. Normative analysis, which involves making value judgments about the desirability of different economic outcomes, cannot be used to test hypotheses.

Question 6

What is the difference between a theory and a hypothesis?
A) A hypothesis is a testable proposition and is tentatively accepted as a theory.
B) A hypothesis abstracts from reality while a theory describes reality.
C) A theory is not an established explanation but a hypothesis is.
D) A theory abstracts from reality while a hypothesis describes reality.

Accepted Answer

A hypothesis is a testable proposition that is initially proposed as a possible explanation for a phenomenon. It is supported or rejected based on empirical evidence. If a hypothesis survives repeated testing and is supported by a large body of evidence, it may be accepted as a theory. A theory is a well-substantiated explanation for a set of phenomena that has been extensively tested and verified. Therefore, a hypothesis is a tentative explanation that is subjected to testing, whereas a theory is a well-substantiated explanation that has been supported by empirical evidence.

Question 7

An economist at the University of Alberta in Edmonton has been asked to explain why the price of Albertan crude oil has fallen recently. Which steps should the professor take in order to assemble a scholarly answer?
A) Develop a hypothesis, test the proposition by engaging in empirical analysis, and examine the data to see if it fits with the facts.
B) Gather data on crude oil prices and seemingly unrelated variables in order to look for associations, then formulate a hypothesis based on those unexpected associations.
C) The oil industry is controlled by a cartel and the economist should gather data from other similarly structured industries to determine a theory.
D) Use a questionnaire to determine why residents of Alberta are not purchasing oil and create a theory based on this data.

Accepted Answer

The best approach would be for the economist to develop a hypothesis, test the proposition by engaging in empirical analysis, and examine the data to see if it fits with the facts. This approach involves a rigorous and objective analysis that will help to ensure that the conclusions are supported by evidence. Gathering data on seemingly unrelated variables (as in B) or looking at other industries that may have different structures (as in C) may not be as effective in explaining the recent drop in oil prices. Using a questionnaire to determine why residents are not purchasing oil (as in D) may also be limited in its scope and may not provide a complete explanation.

Question 8

What does the term "ceteris paribus" mean?
A) Everything is variable.
B) What is True for the individual is not necessarily True for the whole.
C) All variables except those specified are constant.
D) No one knows which variables will change and which will remain constant.

Accepted Answer

"Ceteris paribus" is a Latin term that means "all things being equal" or "other things being held constant." Therefore, the correct choice is C, which states that all variables except for those specified are constant.

Question 9

An economist might hypothesize that people will buy less gasoline at a price of $1.20 per litre than at $1.00 per litre. In order for the hypothesis to become a theory, it would have to be tested. Which of the following observations would seem to support this hypothesis?
A) Individuals buy less gas because they are purchasing more fuel-efficient vehicles.
B) Gasoline consumption varies with the quantity of cars purchased in each region.
C) Individuals in each region respond to an increase in price by purchasing less gasoline.
D) People in each region buy the same amount of gasoline regardless of the price.

Accepted Answer

The observation that individuals in each region respond to an increase in price by purchasing less gas supports the hypothesis that people will buy less gas at a higher price. Choice A could actually contradict the hypothesis if the increase in fuel-efficient vehicle purchases offsets any decrease in gasoline consumption. Choice B and D do not address the relationship between price and gasoline consumption.

Question 10

What does "ceteris paribus" mean?
A) If events A and B occur together, one must cause the other.
B) Other things are held constant.
C) What is True for the individual must be True for the whole.
D) All relevant details are included.

Accepted Answer

"Ceteris paribus" means "other things being held constant." It is often used in economics and other social sciences to isolate the impact of a specific variable while assuming that all other relevant factors remain unchanged.

Question 11

Why do economists need to develop abstractions?
A) to avoid analyzing real-world economic interactions, which are too complicated to understand
B) to understand and explain economic behaviour
C) to avoid committing the fallacy of composition
D) to distinguish normative economic behaviour from positive economic behaviour

Accepted Answer

Economists develop abstractions in order to better understand and explain economic behavior. Abstractions allow economists to simplify real-world economic interactions, making them easier to analyze and comprehend. This can ultimately lead to the development of more accurate economic theories and models.

Question 12

A theory asserts that manufacturers are less willing to sell units of output as the price of goods decreases. However, as the price of computers fell throughout the 1990s, more computers were sold. Which of the following explanations of the apparent conflict between theory and data is most accurate?
A) It is likely that variables other than the price and quantity of computers sold were changing.
B) The theory must be invalid.
C) The theory rests on assumptions that are too simplistic.
D) All variables other than the price and quantity of computers sold were unchanged.

Accepted Answer

Other variables such as advancements in technology, changes in consumer preferences, and changes in marketing strategies could have affected the quantity of computers sold, despite the decrease in price. Therefore, the apparent conflict between theory and data can be explained by the presence of other variables that affected the market for computers.

Question 13

Which of the following is NOT a reason that economists use theories?
A) to explain and help predict human behaviour
B) to understand economic behaviour
C) to develop a testable hypothesis
D) to abstract from the complexities of the world

Accepted Answer

Economists use theories to explain, predict, and understand economic behavior, and to abstract from complexities. Developing a testable hypothesis is a step in the scientific method, not a primary reason for using theories.

Question 14

What does the term "ceteris paribus" mean when used by an economist?
A) Their conclusions are based on normative rather than positive economic analysis.
B) The causal relationship between two economic variables cannot be determined.
C) The analysis is True for the individual but not for the economy as a whole.
D) All other variables except the ones specified are assumed to be constant.

Accepted Answer

"Ceteris paribus" means "all other things being equal" or "holding all else constant". Therefore, when an economist uses this term, they are assuming that all other variables except the ones specified in the analysis are constant, so that the effect of one factor on another can be isolated and examined.

Question 15

Which of the following describes the chain of events involved in creating a theory?
A) Gather data, evaluate results, tentatively accept the theory, and support or refute the hypothesis.
B) Select a theory, create a hypothesis, and evaluate the evidence.
C) Formulate a hypothesis, gather data, evaluate the results, support or refute the hypothesis, and tentatively accept theory.
D) Predict behaviour, evaluate the results, and formulate a hypothesis.

Accepted Answer

The process of creating a theory begins with formulating a hypothesis, followed by gathering data and evaluating the results obtained. Depending on the outcomes of the evaluation, the hypothesis might be supported or refuted, and a theory can be tentatively accepted. This theory can be further supported or refuted through additional data gathering and evaluation. Option A is incorrect as it misses the crucial step of formulating a hypothesis. Option B is incorrect as it suggests that a theory is selected rather than constructed. Option D is incorrect as it assumes that prediction happens before hypothesis formulation, which is not the case in empirical research.

Question 16

How does an economist define a good economic theory?
A) an abstraction from reality useful for explaining but not predicting behaviour (since theories are too simplistic)
B) an opinion that can be tested against economic data
C) an abstraction for the sake of argument
D) a statement or relationship that is used to explain and predict human behaviour

Accepted Answer

A good economic theory should be both explanatory and predictive in nature. It should be able to explain the observed economic phenomenon as well as predict future outcomes based on the theoretical framework. Option A is incorrect because while abstract, economic theories should still be able to make testable predictions. Option B is too narrow as just testing against data is not sufficient to determine the quality of a theory. Option C is also incorrect as the abstraction should be used to derive clear conclusions about economic behaviour.

Question 17

What is the definition of a theory?
A) It is an untestable assertion or statement of untestable fact.
B) It is a normative statement that can be tested empirically through analysis of real-world data.
C) It is a testable statement that can be definitively proven to be True or False using empirical analysis.
D) It is a deliberate simplification of factual relationships that attempts to explain and predict how those relationships work.

Accepted Answer

A theory is a deliberate simplification of factual relationships that attempts to explain and predict how those relationships work. It is not an untestable assertion or statement of untestable fact (A), nor is it a normative statement that can be tested empirically (B). While theories are testable, they cannot be definitively proven to be True or False using empirical analysis (C).

Question 18

What do economists use the term "ceteris paribus" to indicate?
A) Supply and demand are in balance.
B) Their conclusions are based on normative rather than positive economic analysis.
C) Other things are assumed to remain constant.
D) The analysis is True for the individual but not for the economy as a whole.

Accepted Answer

Economists use the term "ceteris paribus" to indicate that all else is being held constant while studying the impact of a particular variable or factor. This helps isolate the effect of the variable being studied and avoid confusion with changes in other factors.

Question 19

What is a hypothesis?
A) It is a normative economic statement.
B) It is a testable proposition.
C) It is a statement that cannot be evaluated using real-world data.
D) It is a model with no connection to the real world.

Accepted Answer

A hypothesis is a testable proposition that can be proven or disproven through observations or experiments. It is an idea that can be tested using empirical evidence. Therefore, option B is the correct answer. Option A is not correct because a normative statement cannot be tested or proved. Option C is also incorrect because a statement that cannot be evaluated using real-world data cannot be a hypothesis. Option D is also not correct because a hypothesis must be connected to the real world through empirical evidence.

Question 20

Why is the ceteris paribus assumption important?
A) It allows one to separate normative economic issues from positive economic ones.
B) It allows one to analyze the relationship between two variables apart from the influence of other variables.
C) It allows one to hold all variables constant so the economy can be carefully observed in a suspended state.
D) It allows one to generalize from the whole to the individual.

Accepted Answer

The ceteris paribus assumption allows economists to isolate the effect of one variable on another, holding all other variables constant. This is important because it helps to identify cause-and-effect relationships and better understand economic phenomena.

Quiz 1: The Role and Method of Economics

On what basis is the best test of an economic theory?

How is an economic theory tested?

Why is economics different from a "hard" science like physics?

Which of the following statements describing the relationship between theory and hypothesis is most accurate?

Which of the following statements about testing an economic hypothesis is the most accurate?

What is the difference between a theory and a hypothesis?

An economist at the University of Alberta in Edmonton has been asked to explain why the price of Albertan crude oil has fallen recently. Which steps should the professor take in order to assemble a scholarly answer?

What does the term "ceteris paribus" mean?

An economist might hypothesize that people will buy less gasoline at a price of $1.20 per litre than at $1.00 per litre. In order for the hypothesis to become a theory, it would have to be tested. Which of the following observations would seem to support this hypothesis?

What does "ceteris paribus" mean?

Why do economists need to develop abstractions?

Which of the following is NOT a reason that economists use theories?

What does the term "ceteris paribus" mean when used by an economist?

Which of the following describes the chain of events involved in creating a theory?

How does an economist define a good economic theory?

What is the definition of a theory?

What do economists use the term "ceteris paribus" to indicate?

What is a hypothesis?

Why is the ceteris paribus assumption important?