Economic Models

Try It

Answer to Try It

1.
    • Apply knowledge of economic theory to assert the form of the relationship.
      Incorrect. Theory is useful for hypothesizing a relationship but if no existing data are available and experimental data are infeasible economists cannot support their theory.
    • Plot projected future data points of each variable against each other in a graph to visualize the  potential future form the relationship.
      Incorrect. Using existing data, not projected possible future data, is a more cost-effective and valid means of establishing and testing relationships between economic variables.
    • Conduct behavioral experiments and make quantitative observations that indicate the form of the relationship.
      Correct. Behavioral economics is becoming increasingly important in validating common economic theories and developing new ones.
2.
    • negative
      Correct. As the price of X rises, the quantity of X purchased falls and therefore the relationship can be deemed negative or "inverse".
    • positive
      Incorrect. As the price of X rises, the quantity of X purchased falls and therefore the relationship cannot be positive.
    • constant
      Incorrect. As the price of X rises, the quantity of X purchased falls and therefore the relationship cannot be constant.