UNCWilmington
ECN 321
Department of Economics and Finance
Dr. Chris Dumas
Homework 2 Solutions
1) What is the
definition of economics
as discussed in lecture and in the class handouts?
Economics is the study of the rational allocation of resources under constraints to meet objectives.
2)
What is a
theory
?
Can anyone ever
prove
a theory?
Why or why not?
A theory is a pattern believed to be observed in data.
A theory CANNOT be proven because any theory
is based on only a limited understanding (limited data, less than full information) of the situation under
study.
3)
What is a
model
?
What are the
three elements
of any model?
A model is a formal, precise statement of a theory.
The three elements of a model are: variables,
parameters and operators.
4)
How does
Inductive Reasoning
differ from
Deductive Reasoning
?
Inductive Reasoning is the process of finding patterns in data.
Inductive Reasoning is used to build a
model from data.
Inductive reasoning uses the methods of graphing and statistical inference.
Deductive
reasoning is the process of finding the implications/forecasts/predictions/theorems that come from a
model.
Deductive reasoning uses the methods of logic and math.
5)
What is the
ceteris paribus
assumption?
The
ceteris paribus
assumption is the modeling assumption that everything in the world outside the
model is assumed to remain constant.
The ceteris paribus assumption creates a "virtual, conceptual
laboratory" within which to examine a model, its operation, and its implications.
6)
What is the principle of
Ockham's Razor
?
Ockham's Razor is a model building principle which states that unimportant details should be "cut away,"
or discarded, from a model.
In practice, applying Ockham's Razor means that a modelbuilder attempts
to create the simplest model that still manages to capture the key aspects of the situation under study.
7) What type of analysis is used to determine the best values for the
parameters
in a model?
Statistical Regression Analysis is typically used to determine the best values for the parameters in a
model.
8) How are the
operators
in a model determined?
In mathematical models, operators are the "plus signs, minus signs, multiplication symbols," etc. in the
equations of the model.
The operators in a model are determined by using Statistical Regression
Analysis in a special way called Nested Modeling.
9) Which type of relationship,
linear
or
nonlinear
, is more important to correctly identify and
analyze when building a model?
Explain why in one or two sentences.
Although linear relationships are important because they are common,
it is almost always more
important to correctly identify and analyze
nonlinear
(rather than linear) relationships in a model,
1
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ECN 321
Department of Economics and Finance
Dr. Chris Dumas
because nonlinear relationships are most often the cause of surprising model results, such as "exploding"
relationships among variables.
10) What is
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 Fall '08
 Dumas
 Economics, Microeconomics, Logic, Dr. Chris Dumas, Fewer apples

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