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Chapter 1: Q 13 (page 16)
Write a sentence contrasting positive and normative economic analysis.
Inflation will lead to falling in aggregate demand is a positive statement whereas the decrease in price levels will cause the aggregate demand to rise.
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Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters鈥� surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Markets, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depending on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.
(a) Which of these two models for forecasting electoral results is more firmly based on the rationality assumption of economics?
(b) How would an economist evaluate which is the better model for forecasting electoral outcomes?
Evaluate the role that rational self-interest plays in economic analysis.
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) An economic study of the number of online searches that individuals conduct before selecting a particular item to purchase online presumes that people are interested only in their own satisfaction, pursue their ultimate objectives, and consider every relevant option.
(b) An economist seeking to predict the effect that an increase in a state's sales tax rate will have on consumers' purchases of goods and services resumes that people are limited in their ability to process information about how the sales-tax-rate increase will influence the after-tax prices those consumers will pay.
(c) To evaluate the impact of an increase in the range of choices that an individual confronts when deciding among devices for accessing the Internet, an economic researcher makes the assumption that the individual is unable to take into account every new Internet-access option available to her.
During her years of college, Dominique discovered that her three favorite subjects were astronomy, chemistry, and political science. She chose to major in astronomy because she had seen data indicating that science majors earn higher-than-average wages and because she liked astronomy better than both chemistry and political science. Upon graduation, however, she learned that average wages in chemistry fields were percent higher than average wages earned by astronomers. Did Dominique's behavior violate the rationality assumption?
Calculate the slope of the function you graphed in Problem A-5.
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