(1) Economic theories simplify reality so that the underlying cause-and-effect relationships among variables can be understood.
(2) Economic variables are quantities or dollar amounts that have more than one value.
(3) An economic model is a simplified way of expressing a theory.
(4) abstractions from reality, and it is necessary to establish the environment and motivation of people for which the theory holds.
(5) A hypothesis is a statement of relationship between two variables that can be tested by empirical verification.
(6) economic principles or laws (or simply "laws" in some contexts).
(7) ceteris paribus, invisible hand.
Class 4:
Here are the answers:
1. In what sense can a criminal person be regarded as engaging in rational behavior?
In economics, a person is considered rational if they make decisions that they believe will maximize their personal benefit, given the information and constraints they face.
A criminal can be viewed as rational if they commit a crime because they believe the expected benefits (money, goods, revenge, satisfaction, etc.) outweigh the expected costs (risk of arrest, punishment, guilt, social consequences).
This does not mean the behavior is moral—only that it follows a cost-benefit reasoning.
2. Suppose the marginal benefit to you of acquiring another suit this year is $200. If the price of suits is $250, and you are rational, will you buy one?
No.
A rational person buys something only if:
Here:
- Marginal benefit = $200
- Marginal cost = $250
Because:
200 < 250
the marginal cost exceeds the marginal benefit.
Therefore, a rational person would not buy the suit.