1. Which of the following best illustrates the application of the model-building process to economics?
a. Two economists with differing political agendas argue about the best way to solve the Social Security problem on a Sunday morning talk show.
b. A labor economist notices that unemployment tends to be higher among teenagers than more experienced workers, develops a model, and gathers data to test the hypotheses in the model.
c. A Ph.D. student in economics develops a plausible mathematical model for his dissertation, but there is no data to test the model.
d. Economists come to believe that some economic models are true simply because prominent leading economists say they are true.
2. Which of the following represents causality rather than association?
a. In years that fashion dictates wider lapels on men’s jackets, the stock market grows by at least 5 percent.
b. Interest rates are higher in years ending with a 1 or a 6.
c. Unemployment falls when the AFC champion wins the Super Bowl.
d. Quantity demanded goes up when price falls because lower prices increase consumer purchasing power, and because some consumers of substitute goods switch.
3. Which of the following correctly describes the ceteris paribus assumption?
a. If we increase the price of a good, reduce consumer incomes, and lower the price of substitutes, and if quantity demanded is observed to fall, we know that the price increase caused that decline in quantity demanded.
b. If the federal government increases government spending, and the Federal Reserve Bank lowers interest rates, we know that the increase in government spending caused unemployment to fall.
c. If a company reduces its labor costs, negotiates lower materials costs from its vendors, and advertises, we know that the reduced labor costs are why profits are higher.
d. If we decrease the price of a good and observe that there is an increase in the quantity demanded, holding all other factors that influence this relationship constant.
4. The condition of scarcity
a. cannot be eliminated.
b. prevails in poor economies.
c. prevails in rich economies.
d. all of the above are correct
5. Which of the following best describes an entrepreneur?
a. A person who works as an office clerk at a major corporation.
b. A person who combines the factors of production to produce innovative products.
c. A special type of capital.
d. Wealthy individuals who provide savings that stimulates the economy.