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Unformatted text preview: cause there might be other explanations that fit the data). The
partially validated model can be further refined by relaxing some of the original assumptions: for example, we could
posit that monthly savings depends on monthly income and the expected rate of inflation). The new model is again
subjected to the cycle of predictions, testing, rejection, or acceptance and refinement ad infinitum. 3
4 We’ll see examples of such firms when we do the HBS case The Aluminum Industry in 1994 written by Ken Corts, director of Rotman Commerce.
That’s one reason you’re taking ECO 220.
2 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. In the past, some ECO 204 students have become disillusioned with microeconomic models because they found the over
simplifying assumptions unpalatable. It also doesn’t help when there are many self-proclaimed pundits railing against
economic models: “How can economists assume Homo Economicus is rational and has rational expectations?” “How can
economics be “trusted” when it can’t even forecast stock markets crashes, recessions, or movement of macro
variables?” Such charges are erroneous and misplaced. The charges are erroneous because scientists don’t literally
believe that their assumptions are true; they make the assumptions because they want to build tractable models. The
charges are misplaced because economists aren’t the only creatures who make simplifying assumptions – so do
physicists, chemists, etc. but you don’t see YouTube videos of pundits railing against “unrealistic assumptions” in physics
(well, sometimes you do). Most pundits who rail against economics (check out these mutterings of a “risk consultant”)
do it because the timbre of economics makes it easy to pontificate about a subject they’ve never studied economics (or
never studied beyond the intermediate level)....
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