Econ Ch 3. quiz notes.docx - Econ Ch 3 If we based a theory that A happens that B follows we are making a prediction and can test it with empirical

Econ Ch 3. quiz notes.docx - Econ Ch 3 If we based a theory...

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Econ Ch 3 If we based a theory that A happens that B follows we are making a prediction and can test it with empirical observations. If we observe that when variable A decreases, variable B also decreases, we can say that the two variables are correlated. We cannot necessarily say that there is a causal relationship between A and B. An important assumption in economics is that people and firms seek self interest. We assume individuals seek to maximize their utility and firms seek to maximize their profit. An important assumption that is made in economics is that individuals and firms pursue their own self- interest. We assume that individuals seek to maximize their utility and firms seek to maximize their profit. These are considered to be motives. An endogenous variable is a variable that is explained within a theory while an exogenous variable is a variable that is determined outside the theory. The causality between the two is one-way: the exogenous variable influences the endogenous variable, but not vice versa.
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