MicroEconomics Chapter 2

A positive correlation implies that two variables tend to move in the same direction

Positive Correlation

Randomization is the assignment of subjects by chance, rather than by choice, to a treatment group or control group

Randomization

Reverse causality occurs when we mix up the direction of cause and effect

Reverse Causality

The scientific method is the name for the ongoing process that economists and other scientists use to (1) develop models of the world and (2) test those models with data

Scientific Method

To say that economists use the scientific method means that they are using​ ___________. A. a process to develop models that are intended to exactly represent all the details of a system. B. a method to develop recommendations for policy makers to run economies. C. a method to determine the best course of action for fiscal and monetary policy. D. an ongoing process to develop models of the world and then test and evaluate those models.

D

Data are facts, measurements, or statistics that describe the world

Data

An omitted variable is something that has been left out of a study that, if included, would explain why two variables that are in the study are correlated

Omitted Variable

A variable is a factor that is likely to change or vary

Variable

Some people choose to go to the dentist quite frequently. You compare the number of cavities for these people relative to those who do not go to the dentist at all. Using the concept of a natural​ experiment, which of the following statements is true about the​ scenario? A. This is not a natural experiment. B. This is a decent natural experiment. C. This is a good natural experiment.

A

Your client becomes critical of your​ "sloppy" technique of using a model that does not include all factors. What is the most appropriate reply to this​ criticism? A. Economic models are meant to be approximations that predict what happens in most circumstances. B. Economic models are meant to exactly predict each and every outcome by using all variables. C. Even a simplified economic model can provide two standard deviations accuracy. D. Even a simplified economic model can provide 99 percent accuracy.

A

Suppose you have been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. Your client would like your team to perform a study on​ customers' gasoline purchasing habits when they notice price increases. You suggest that the team​ _____________. A. develop a model that allows for scenario analysis. B. design and execute an experiment. C. collect competitor data. D. utilize artificial intelligence to model human behavior.

B

Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. During a meeting with your​ client, the CEO asks if your economic models include all factors that impact gasoline prices. What is your response to his​ question? A. No, since the economic convention is to limit inclusion to the top three variables. B. No, the model is a simplified representation of reality. C. Yes, the model includes all factors. D. Yes, the model includes every result from related academic papers and all industry expertise.

B

What is meant by randomization in the context of an economic​ experiment? A. Economic experiments are not arranged in a logical sequence. B. Subjects are assigned by​ chance, rather than by​ choice, to a group. C. Subjects are assigned to control and test groups by noneconomic factors such as race. D. Group numbers are arranged in a nonsequential order.

B

How do economists distinguish between models that work and those that​ don't? A. They publish their model results in academic journals. B. They have their models reviewed by other economists. C. They test their models against​ real-world data. D. They program their models into computers to test via simulation.

C

Causation occurs when one thing directly affects another through a cause-and-effect relationship

Causation

A correlation means that two variables tend to change at the same time

Correlation

Empirical evidence is a set of facts established by observation and measurement

Empirical Evidence

An experiment is a controlled method of investigating causal relationships among variables

Experiment

Hypotheses are predictions (typically generated by a model) that can be tested with data

Hypotheses

The mean, or average, is the sum of all the different values divided by the number of values

Mean

The median value is calculated by ordering the numbers from least to greatest and then finding the value halfway through the list

Median

A model is a simplified description, or representation, of the world. Sometimes, economists will refer to a model as a theory. These terms are often used interchangeably

Model

A natural experiment is an empirical study in which some process—out of the control of the experimenter—has assigned subjects to control and treatment groups in a random or nearly random way

Natural Experiment

Negative correlation implies that two variables tend to move in opposite directions

Negative Correlation

Zero correlation implies that two variables have movements that are not related

Zero Correlation