1. What is the purpose of an economic model?
The purpose of an economic model is to simplify reality in order to analyze, explain, and predict economic behavior and outcomes. Models help economists understand complex systems by focusing only on the most important variables and relationships.
2. How can marginal analysis be used to explain rational behavior?
Marginal analysis compares the additional benefit (marginal benefit) of an action with the additional cost (marginal cost). Rational behavior means people will choose to do something if the marginal benefit is greater than or equal to the marginal cost. For example, a student studies one more hour if the expected improvement in grades (benefit) is greater than the lost leisure time (cost).
3. Give an example of a behavioral assumption in an economic model. What is the purpose of using behavioral assumptions in economic models?
• Example: “Consumers act to maximize their utility (satisfaction) given their limited income.”
• Purpose: Behavioral assumptions simplify analysis by giving models a logical foundation. They make predictions possible by assuming people act in consistent, predictable ways.
4. A person makes decisions by habit. This person considers neither the benefits nor the costs of his or her actions. Can the person be considered rational?
No, this person cannot be considered rational in economic terms. Rationality requires weighing costs and benefits to make choices that maximize satisfaction or utility. Acting out of habit ignores this process, so it is not considered rational behavior in
economics.
5. In what ways do economic theories and models abstract from reality? Why are unrealistic models useful?
• Abstraction from reality: Models often ignore details such as emotions, imperfect information, or unique individual behavior. They may assume things like “perfect competition” or “full rationality” which don’t always exist in real life.
• Usefulness: Even though they are unrealistic, models highlight key relationships and principles. They help us understand cause-and-effect, make predictions, and provide a framework for analyzing real-world issues.
