Question

Which of the following statements is correct?

Answer 1

Answer:

The correct answer is d. Different economic models employ different sets of assumptions.

Explanation:

To approach the study of economic reality it is necessary, in some way, to simplify it; keep certain variables under control. Precisely for this, it is that economic models are built.

Economic models are built on principles of departure, called "assumptions." Such assumptions fulfill the same role as the postulates in geometry. That is:

1. They are not subject to deduction from other more basic principles.
2. They are "reasonably" true but not necessarily verifiable.
3. They function as premises in the logical structure to deduce the conclusions and correlations found in the lowest levels of generality.

We can say then, that the theoretical explanations refer to invisible "relationships", whose existence is proposed by the theory, and whose implications are logically deduced, and then corroborated by observations. They consist of:

1. Assumptions (eg subjects want to maximize their earnings).
2. Relevant variables (eg price and quantity).
3. Binding hypothesis (eg quantity demanded based on price).
4. Conclusions or predictions of observable facts (eg prices will rise).