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Chapter 1: Q. 12 (page 15)

Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to

incentives?

(a) For every 10 exam points Myrna must earn in order to pass her economics course and meet her graduation requirements, she will study one additional hour for her economics test next week.

(b) A coin toss will best predict Leonardo鈥檚 decision about whether to purchase an expensive business suit or an inexpensive casual outfit to wear next week when he interviews for a high-paying job he is seeking.

(c) Celeste, who uses earnings from her regularly scheduled hours of part-time work to pay for her room and board at college, will decide to buy a newly released DVD this week only if she is able to work two additional hours.

Short Answer

Expert verified

(a) A model

(b) Not a model

(c) A model

Step by step solution

01

Step 1. Economic Model.

Economic models are based on representations of the real world which are used as a basis for predictions and analysis.

02

Step 2. Model or not a model

(a)This represents a model. The conclusion is based on realistic data collected. We can practically test the results using empirical data.

(b) This does not represent a model. The tossing of a coin is not related to the decision-making process. It is based on probability which is less empirical and more statistical.

(c) This represents a model. The additional working of two hours is based on actual empirical testing which we can test and find out whether it is realistic or not.

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Most popular questions from this chapter

In a single sentence, contrast microeconomics and macroeconomics. Next, categorize each of the following issues as either a microeconomic issue, a macroeconomic issue, or not an economic issue.

(a) The national unemployment rate.

(b) The decision of a worker to work overtime or not.

(c) A family鈥檚 choice to have a baby.

(d) The rate of growth of the money supply.

(e) The national government鈥檚 budget deficit.

(f) A student鈥檚 allocation of study time across two subjects.

For each of the following items, state whether a direct or an inverse relationship is likely to exist.

(a) The number of hours you study for an exam and your exam score.

(b) The price of pizza and the quantity purchased.

(c) The number of games the university basketball team won last year and the number of season tickets sold this year.

For each of the following approaches that an economist might follow in examining a decision-making process, identify whether the approach relies on the rationality assumption or on the assumption of bounded rationality:

(a) To make predictions about how many apps a person will download onto her tablet device, an economist presumes that the individual faces limitations that make it impossible for her to examine every possible choice among relevant apps.

(b) In evaluating the price that an individual will be willing to pay for a given quantity of a particular type of healthcare service, a researcher assumes that the person considers all relevant health care options in pursuit of his own long-term satisfaction with resulting health outcomes.

(c) To determine the amount of time that a person will decide to devote to watching online videos each week, an economist makes the assumption that the individual will feel overwhelmed by the sheer volume of videos available online and will respond by using a rule of thumb.

Does the phrase 鈥渦nlimited wants and limited resources鈥� apply to both a low-income household and a middle-income household? Can the same phrase be applied to a very high-income household?

Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.
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