Exam 21: Thinking Like a Modern Economist

Suppose people believe that prices will continue to fall in the future, and so they put off buying things now. As a result, prices fall. In economics we refer to this as a(n):

Science is justified through heuristic models.

The main advantage that ACE models have over other models is that:

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?

Give an example of predictably irrational behavior.

The idea that small changes can render behavior or another complex system completely unpredictable is referred to as the:

An economist observes that a pharmaceutical company is sponsoring a diabetes clinic and providing free medications. She concludes that the pharmaceutical company is reducing short-term profits for the possibility of higher long-term profits. This economist is most likely a(n):

To allow heuristic models to provide us with a better understanding of economic problems, it is important to:

Scientists are very hesitant to base any knowledge on heuristic models because:

Until the 1940s economics tended to focus on deductive reasoning. This can be attributed to the:

An economist looks at data that suggests that people are making decisions that are based on rules of thumb. She concludes that people tend to make decisions that are based on habit and not on the economic decision rule. She is most likely a(n):

The endowment effect is used to describe the mistake a consumer makes when he or she accounts for the monetary costs of his or her decisions but ignores the nonmonetary opportunity costs.

The more complex a model is, the easier it is to arrive at a conclusion.

"Letting the data speak" in economics refers to:

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?

Traditional models see no role for the government in pushing individuals toward the preferred equilibrium.

Behavioral economists support:

Assuming that people follow enlightened self-interest allows behavioral economists to create a single clear-cut model that can be applied across many different contexts.

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

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