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PART I INTRODUCTION MICROECONOMICS AND MARKETS CHAPTER 1 PRELIMINARIES REVIEW QUESTIONS 1. It is often said that a good theory is one that can in principle be refuted by an empirical, data-oriented study. Explain why a theory that cannot be evaluated empirically is not a good theory. There are two steps in evaluating a theory: first, you should examine the reasonability of the theory’s assumptions; second, you should test the theory’s predictions by comparing them with facts. If a theory cannot be tested, it cannot be accepted or rejected. Therefore, it contributes little to our understanding of reality. 2. Which of the following two statements involves positive economic analysis and which normative? How do the two kinds of analysis differ? a. Gasoline rationing (allocating each year to each individual an annual maximum amount of gasoline that can be purchased) is a poor social policy because it interferes with the workings of the competitive market system. b. Gasoline rationing is a policy under which more people are made worse off than are made better off. Positive economic analysis describes what is . Normative economic analysis describes what ought to be . We know from economic analysis that a constraint placed on supply will change the market equilibrium. Statement (a) merges both types of analysis. First, statement (a) makes a positive statement that gasoline rationing "interferes with the workings of the competitive market system." Second, by making the normative statement (i.e., a value judgment) that gasoline rationing is a "poor social policy," statement (a) confines itself to a conclusion derived from positive economic analysis of the policy. Statement (b) is positive because it states what the effect of gasoline rationing is without making a value judgment about the desirability of the rationing policy. 3. Suppose the price of unleaded regular octane gasoline were 20 cents per gallon higher in New Jersey than in
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This note was uploaded on 12/04/2010 for the course BUAD 38384 taught by Professor Franklin during the Spring '10 term at Alabama.

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