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 subway map: how is it similar to and how does it differ from the real city?

A café wants a simple model to predict how many coffees it will sell depending on the price it sets. State which two variables the model would include, which things it would leave out (weather, exams, road construction on the street) and why leaving them out does not make the model useless.

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?

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

Explain what an economic variable is and give three examples (price, quantity sold, household income). Then, in the statement "if it gets hotter, more ice cream is sold", indicate which variable is to be explained and which is used to explain it.

What is an assumption within a model? Point out two hidden assumptions in this statement: "if the bus fare falls, more students will use it" (think about trip time, distances, or the price of the alternatives).

A school model states: "the more weekly hours of study, the higher the average grade".

1. a) Which is the explained variable and which is the explanatory one?
2. b) Name two factors that the model leaves out and that can alter the result.
3. c) How would you test the model against data from your own class?

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.

What is a prediction in economics and how do you check whether it was accurate? Give an example of a prediction about the market in your town (rental prices, store openings) and explain what data you would look at a year later.

One state raises the minimum wage in its public sector and the neighboring one does not. Researchers compare the evolution of employment in both before and after.

1. a) What does this testing strategy called a "natural experiment" consist of?
2. b) What assumption must hold for the comparison to be valid? Reason out what could spoil it.

A stationery store records the price of its notebooks and the units sold for four weeks in a row: at $\$3$ it sells $90$; at $\$4$, $75$; at $\$5$, $62$; at $\$6$, $50$.

1. a) What pattern do the data suggest?
2. b) Formulate a model hypothesis and a testable prediction for a price of $\$7$, stating what assumption you are making.

In summer, ice cream sales rise and so do drownings at beaches, but nobody says that ice cream causes drownings. Use this example to explain the difference between correlation and causation, and why confusing them leads to bad decisions.

The minimum wage rises and youth unemployment does not change. One economist concludes: "raising the minimum wage does not destroy jobs"; another replies: "without the rise, unemployment would have fallen".

1. a) Explain how the same piece of data admits two interpretations.
2. b) What additional data would you need to decide which is more plausible? Relate it to the idea of "what would have happened" (the counterfactual scenario).