Question

Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to

incentives?

(a) For every 10 exam points Myrna must earn in order to pass her economics course and meet her graduation requirements, she will study one additional hour for her economics test next week.

(b) A coin toss will best predict Leonardo’s decision about whether to purchase an expensive business suit or an inexpensive casual outfit to wear next week when he interviews for a high-paying job he is seeking.

(c) Celeste, who uses earnings from her regularly scheduled hours of part-time work to pay for her room and board at college, will decide to buy a newly released DVD this week only if she is able to work two additional hours.

Short answer

(a) A model

(b) Not a model

(c) A model

Step-by-step solution

Step 1. Economic Model.

Economic models are based on representations of the real world which are used as a basis for predictions and analysis.

Step 2. Model or not a model

(a)This represents a model. The conclusion is based on realistic data collected. We can practically test the results using empirical data.

(b) This does not represent a model. The tossing of a coin is not related to the decision-making process. It is based on probability which is less empirical and more statistical.

(c) This represents a model. The additional working of two hours is based on actual empirical testing which we can test and find out whether it is realistic or not.