Exercises: Modelling and the economic method

Explain what an economic model is and why simplifying reality is not a flaw but a necessity. Compare it to a tube map: how is it similar to and how does it differ from the real city?

What does the Latin phrase "ceteris paribus" mean and why do economists use it? Give an example applied to the relationship between cinema ticket prices and the number of viewers.

The figure shows the steps of the scientific method applied to economics, with one step covered by a question mark. State which step is missing and explain what is done in each of the others.

A model of the sandwich market assumes that all buyers know the prices of all cafeterias and that all sandwiches are identical.

1. a) Why are these assumptions not met in reality?
2. b) Why can the model still be useful despite this?

In a classroom, an auction is simulated: the teacher "sells" ten cinema tickets and the students bid using points redeemable for supplies.

1. a) What does this consist of as an economic experiment?
2. b) State one advantage and one limitation of learning economics through classroom experiments instead of observing the real world.

In the model "the higher the ticket price, the fewer bus passengers", indicate which variable the model tries to explain and which is taken as a starting given. Propose two external factors that the model leaves out and that could alter the result.

A consultancy predicts using a model that raising train tickets by $10\ \%$ will reduce passengers by $5\ \%$. The following year, the price rises by $10\ \%$ and passenger numbers fall by $12\ \%$.

1. a) Give two possible explanations for the failure of the prediction.
2. b) Does the failure mean that the model was useless? Reason your answer.

We want to model why some newsagents sell more than others. Design the model: choose three variables you would include, two reasonable simplifying assumptions, and explain how you would check whether the model works.

To test whether a new rent subsidy of $\$250$ per month for young people makes housing more affordable for them or ends up driving up rents, a government proposes: "Let us implement it across the entire country for one year and observe whether average rent prices go up or down." Several economists point out that such a test would not allow valid scientific conclusions to be drawn.

1. a) Justify why the government's proposal fails from the point of view of the scientific method: why does a simple "before and after" price comparison fail to isolate the effect of the subsidy (breakdown of the ceteris paribus condition)?
2. b) Faced with the impossibility of experimenting in a closed laboratory, design a strategy based on a "natural experiment" (for example, comparing bordering geographic areas or groups with and without the subsidy) that makes it possible to empirically test the impact of the policy.