Chapter 2

Question 1

distinguish between positive and normative statements

Answer 1

positive = what actually is
normative = what ought to be

Question 2

distinguish between endogenous and exogenous variables

Answer 2

endogenous = explained within a theory (aka dependent variable)
exogenous = determined outside the theory (aka independent variable)

Question 3

what is a theory’s purpose?

Answer 3

• also called a model

- designed to explain and predict what we see

Question 4

what does a theory consist of?

Answer 4

• definitions of the variables to be discussed
• set of assumptions about how things behave
• conditions under which the theory is meant to apply

Question 5

what’s a variable?

Answer 5

any well-defined item, such as the price or quantity of a commodity, that can take on various specific values

Question 6

what do a theory’s assumptions concern?

Answer 6

• motives
• directions of causation
• conditions under which the theory is meant to apply

Question 7

what do we assume for motives in economics?

Answer 7

individuals seek to maximize their utility, firms seek to maximize profits

Question 8

what is direction of causation?

Answer 8

the fact that a variable leads to the result of the other variable

Question 9

what are predictions?

Answer 9

propositions that can be deduced from a theory. often called hypotheses.

Question 10

_____ leads to the construction of theories, theories generate specific _____, and the predictions are tested by _____

Answer 10

empirical observations, predictions, more detailed empirical observations

Question 11

what is the significance of rejecting a prediction/hypothesis?

Answer 11

the value of the theory is brought into question

Question 12

what is the significance of accepting a prediction/hypothesis

Answer 12

the theory is confirmed (though confirming evidence can be found for any theory)

Question 13

true or false: controlled experiments are a central aspect of economics

Answer 13

false - it’s a non-laboratory science and uses millions of uncontrolled constantly ongoing “experiments”

Question 14

what is an index number?

Answer 14

a measure of some variable, conventionally expressed relative to a base period, which is assigned the value 100

Question 15

define cross-sectional data

Answer 15

set of observations made at the same time across several different units (such as households, firms, or countries)

Question 16

define time-series data

Answer 16

a set of observations made at successive periods of time

Question 17

what is a scatter diagram?

Answer 17

a graph showing two variables, one measured on the horizontal and the other on the vertical axis. each point represents the values of the variables for a particular unit of observation

Question 18

for non-linear functions, the slope of the curve changes as X changes. Therefore, the marginal response of Y to a change in X depends on the value of _____

Answer 18

X

Question 19

when payoff is positive but diminishes over a range, this is called a:

Answer 19

diminishing marginal response

Question 20

when payoff is positive and increases over a range, this is called a:

Answer 20

increasing marginal response