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33) Which of these social sciences deals most with models of behavior rather than with thought
processes?
A) psychology
B) sociology
C) political science
D) economics
34) Which of the following best describes how economists test the empirical predictions of
economic models?
A) Economists survey individuals to learn about how people think through decisions about how
much to purchase or to produce.
B) Economists collect and analyze real-world observations of people’s actions to discern if those
actions accord with theories’ predictions.
C) Based on theories about thought processes, economists seek to determine which thought
processes predominate in determining how a person decides what actions to take.
D) Recognizing that people always do what they say they will do, economists rely exclusively on
information gleaned from polls and surveys conducted by poll takers and market researchers.
35) When constructing economic models, economists are more concerned with
A) what people say than what they do.
B) what people think than what they need.
C) what people do than what they say.
36) Behavioral economics is an approach to the study of consumer behavior
A) that emphasizes psychological limitations and complications that potentially interfere with
rational decision making.
B) that emphasizes the capabilities of individuals to succeed in attaining all their unlimited wants
utilizing limited resources.
C) that, in contrast to standard approaches in economics, utilizes the ceteris paribus assumption.
D) that, in contrast to standard approaches in economics, relies on real-world data to evaluate the
usefulness of economic models.
37) The hypothesis that people are nearly, but not fully rational, cannot possibly fully examine
every available choice, and utilize simple rules of thumb in making decisions is known as the
A) irrationality hypothesis.
B) ceteris paribus hypothesis.
C) individual aggregation hypothesis.
D) bounded rationality hypothesis.
38) According to the bounded rationality hypothesis, an individual confronting a large number of
complicated choices is most likely to respond by
A) using a simple rule of thumb to choose among a subset of easiest-to-evaluate options.
B) using the ceteris paribus assumption to assist in simplifying and examining each of the
possible options.
C) utilizing readily available empirical evidence to assist in evaluating every option.
D) assessing every available choice by developing sophisticated theories regarding each option.
39) An economic theory is also known as an economic
A) model.
B) prediction.
C) conclusion.
D) assumption.
40) Economic models are
A) always based on laboratory methods similar to natural sciences.
B) a simplified representations of the real world.
C) used only in conducting experiments about how people behave.
D) used in macroeconomic analysis but not in microeconomic analysis.
41) Economic models are NOT used to
A) explain economic phenomena.
B) predict economic phenomena.
C) understand economic phenomena.
D) describe all economic phenomena in finest detail.
42) To test their theories, economists usually have to
A) set up careful laboratory experiments with all variables controlled.
B) first examine theory and compare it with what happened in the past in the real world.
C) use only models that have a proven record of success.
D) conduct experiments that involve people who do not behave rationally.
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43) A difference between biology and economics is that
A) economists use models and biologists use theories.
B) biologists often use laboratory experiments and economists do less often.
C) economics explains events while biology predict events.
D) biologists use the scientific method while economists do not.
44) Models must
A) be able to yield useable predictions.
B) be totally realistic in every detail.
C) be a complete reproduction of the real world.
D) include every relationship that exists.
45) A good economic model
A) cannot be refuted.
B) describes the real world completely and in detail.
C) captures the essential relationships of the problem under consideration.
D) captures all relationships about the problem under consideration.
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46) Which of the following statements is NOT true?
A) Economics is a social science.
B) Economics is an empirical science.
C) Economics does not use theories.
D) Economics is the study of how people allocate their limited resources to satisfy their
unlimited wants.
47) A characteristic of a good model is that
A) its predictions can be tested using real-world data.
B) it is useful for making irrefutable predictions.
C) it applies to all situations.
D) it predicts perfectly.
48) In an economic model, assumptions
A) must be applicable to all real-world situations.
B) must be eliminated before being used to make sure the model is realistic.
C) are not important in determining the usefulness of the model.
D) define the set of circumstances in which the model is most likely to be applicable in the real
world.
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49) Because models are used to explain economic behavior
A) the assumptions must be complex while the models themselves are simple.
B) models must be complex.
C) models must be simple.
D) models can be either simple or complex so long as it explains economic behavior.
50) “Ceteris paribus” assumption means
A) the role of rational self-interest in the economy.
B) that nothing else changes except the variables under consideration.
C) relying on real-world data in evaluating the usefulness of a model.
D) analysis that is strictly limited to making purely positive statements.
51) If economists are making the assumption that business people try to maximize profits, the
best way to determine whether this assumption is useful or not is to
A) see whether it generates accurate predictions about the choices of business people.
B) ask business people whether it is true or not.
C) find out whether U.S. businesses are more profitable than European businesses.
D) take a survey of people and see if they agree with this assumption.
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52) The assumption that nothing changes EXCEPT the variables being studied is
A) the ceteris paribus assumption.
B) the rationality assumption.
C) positive economic analysis.
D) normative economic analysis.
53) “Ceteris paribus” means
A) “invisible hand.”
B) “other things equal.”
C) “making all the necessary changes.”
D) “at the aggregate level.”
54) A scientist who is studying earthquakes includes the impact of wind when performing some
tests of damages to structures. This is an example of
A) failing to understand how to do scientific methodology.
B) irrational behavior in noneconomic situations.
C) accounting for every possible phenomena that may effect the problem under examination.
D) failing to hold all other things constant.
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55) Economics is an empirical science, which means that economists
A) look at evidence to see whether or not the model is applicable.
B) test their models by utilizing unknown variables.
C) do only laboratory experiments.
D) refuse to test their models since the usefulness of a model is determined by whether it is
logical or not.
56) Which expression below matches most closely the way economists go about testing their
models?
A) “Consistency is the hobgoblin of small minds.”
B) “Seeing the results is the only way to know if you are right.”
C) “A bird in the hand is worth two in the bush.”
D) “In the long run, we are all dead.”
57) Economic models relate to
A) people’s choices.
B) how people think about something.
C) choice.
D) the reasons people give for donating to charity.
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58) A poll conducted by a national firm finds that most Americans say they care more about
safety when buying a car than about fuel efficiency. As a result, a car maker produces a car with
many safety features, but it doesn’t sell well. This behavior
A) contradicts economic theory because the people didn’t do what they said they would do.
B) contradicts economic theory because it is irrational not to purchase safer cars.
C) does not contradict economic theory because economists focus on what people do rather than
on what they say.
D) does not contradict economic theory because economic theory only relates to prices and not
to features such as safety.
59) According to proponents of behavioral economics, because every possible choice cannot be
considered, an individual will tend to fall back on methods of making decisions that are simpler
than trying to sort through every single possibility, known as
A) rules of thumb.
B) rational options.
C) irrational choices.
D) normative decisions.
60) Which of the following is NOT an alleged “unrealistic” assumption that proponents of
behavioral economics suggest are commonly utilized in traditional economic models based on
the rationality assumption?
A) unbounded selfishness
B) unbounded rationality
C) unbounded will power
D) unbounded resources
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61) If psychological limitations and other complications cause people to be unable to examine
and think through every possible choice available to them and rely instead on rules of thumb,
then these individuals exhibit
A) completely irrational behavior.
B) normative thinking.
C) bounded rationality.
D) positive thinking.
62) A theory or a model
A) is a simplified, abstract view of reality.
B) is based on each economist’s value judgments.
C) is a detailed analysis of what ought to be.
D) captures all aspects of the real world.
63) Ceteris paribus means
A) “all variables are independent.”
B) “other things being constant.”
C) “some assumptions are unrealistic.”
D) “some theories are not rational.”
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64) The ceteris paribus assumption means
A) favors are returned in kind.
B) this is the proof of the matter.
C) from many, one.
D) other things are equal.
65) In building a model the assumption that allows economists to study only the factors being
analyzed is the
A) rationality assumption.
B) ceteris paribus assumption.
C) the self-interest assumption.
D) the scarcity assumption.
66) Ceteris paribus means
A) other variables are held constant.
B) almost certainly.
C) only if everything works just right.
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67) In constructing models, economists
A) consider all factors that can change.
B) include all available information.
C) attempt to duplicate the real world.
D) make simplifying assumptions.
68) In building a model to analyze economic situations, one of the important assumptions is
A) ceteris paribus.
B) scarcity.
C) conversion abstraction.
D) cognitive dissonance.
69) Assumptions are necessary to
A) make economics a social science.
B) define a set of circumstances where a model is most likely to apply.
C) define the relationship between wants and resources under all circumstances.
D) define the specific cause and effect relationship that is being explained by social sciences.
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70) Ceteris paribus means
A) all men are created equal.
B) wage parity between men and women is a worthy goal.
C) there are an infinite number of factors affecting each human decision and they change all the
time.
D) economists isolate one or two factors that change when analyzing human decisions.
71) Economic models are used to
A) simplify reality to predict outcomes.
B) exactly replicate reality.
C) predict all possible outcomes of a study.
D) determine the thoughts of individuals.
72) Economic models
A) must capture every detail or interrelationship that exists.
B) are simplified representations of the real world.
C) must use laboratory experiments.
D) All of the above are correct.
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73) Economics may be referred to as a(n) ________ science, meaning that data is looked at to
see whether assertions are correct.
A) empirical
B) exact
C) natural
D) soft
74) The term ceteris paribus is an economic assumption that means
A) let the buyer beware.
B) logical common sense.
C) the detail is in the interrelationship.
D) other things being equal.
75) The value of a model is determined by
A) the usefulness of its predictions in the real world.
B) the extent of the profit earned by applying it.
C) the realism of its assumptions.
D) the model’s attention to real world details.
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76) Assumptions in models tend to make
A) the model predict what the scientist wants the results to be.
B) the model more realistic.
C) the model more applicable to specific circumstances.
D) the model always predict the future accurately.
77) What would lead an economist to conclude that Theory A is superior to Theory B?
A) Theory A predicts real-world events better than does Theory B.
B) The assumptions underlying Theory A are more realistic than are the assumptions underlying
Theory B.
C) Theory A explains how people think, whereas Theory B only explains what they do.
D) Theory A is based on the assumption that an individual typically cannot determine what is in
his or her own best interest, whereas Theory B assumes that each person knows what is in his or
her own best interest and acts accordingly.
78) Why do economists test their hypotheses?
A) to see whether people are motivated by self-interest
B) to see whether their models predict the choices people will make
C) to determine whether government policies have effectively achieved their goals
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79) Which of the expressions below best describes the aim of economic theory?
A) to predict how people think about money
B) to understand why money motivates some people more than others
C) to predict the choices people will make
D) to learn what we can do to prevent people from having unrealistic wants
80) Based on your understanding of your roommate’s preferences, you predict that he will select
the spaghetti for his lunch at the cafeteria, but instead he chooses the gyros. How do you describe
this event in terms of economic theory?
A) Your roommate is irrational.
B) Your roommate does not know what is in his own best interests.
C) You roommate does not know his own preferences as well as you do.
D) You constructed a model that made a prediction, and the prediction was refuted.
81) Which of the following statements about economic models is TRUE?
A) The best economic models must be most complex.
B) A good model does not rely on any assumptions.
C) Every model is based on a set of assumptions.
D) Economic models are designed to explain what people need.
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82) A common approach that economists use to understand, explain and predict economic
phenomena is to
A) form a theory or model.
B) conduct experiments in a science lab.
C) ask what people think.
D) examine people’s thought processes.
83) By using the ceteris paribus assumption in conjunction with a model, economists can
A) suspend the rationality assumption.
B) avoid having their model depend on any additional assumptions.
C) hold certain factors constant.
D) be sure that the model will predict correctly.
84) What is meant by saying that economics is an empirical science?
A) Economic theories will be tested by seeing how well they correspond to people’s declared
preferences.
B) Economic theories cannot be tested because there is no means of measuring economic
variables with adequate precision.
C) Economic theories cannot be tested because economic variables change too quickly.
D) Economic theories will be tested by seeing how well they correspond to real-world
phenomena.
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85) The combination of psychology and economics to determine individual decision making is
known as
A) behavioral economics.
B) psychonomics.
C) neuronomics.
D) positive analysis.
86) Behavioral economics deals with
A) the assumption that people are always selfish.
B) bounded rationality.
C) unbounded willpower.
D) only theories without justification from empirical evidence.
87) Which of the following is a behavioral implication of bounded rationality?
A) unbounded selfishness
B) a rule of thumb
C) a rational mistake
D) a nervous breakdown
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88) Which of the following describes that people cannot examine every possible choice available
to them but instead use simple rules of thumb to sort among the alternatives that happen to occur
to them?
A) self-interest
B) bounded rationality
C) ceteris paribus
D) normative economics
89) According to behaviorial economists, traditional economic models assume all the following
characteristics EXCEPT
A) unbounded selfishness.
B) unbounded resources.
C) unbounded willpower.
D) unbounded rationality.
90) What does it mean to say economics is an empirical science, and how is this related to the
question of deciding on the usefulness of a model?
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91) “To be useful, a model must be completely realistic.” Evaluate.
92) Suppose a survey is taken concerning car safety. According to the survey, people strongly
desire safer cars and indicate they are willing to pay substantially more for safer cars. Using this
information, one auto firm adds numerous safety features to its car, raising the price by several
thousand dollars. Sales drop sharply, and the firm loses profits. What went wrong?
1.5 Positive versus Normative Economics
1) Normative economic statements
A) violate the law of ceteris paribus.
B) contain value judgments.
C) are usually irrational.
D) are easily testable.