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Chapter 1: Q 15 (page 16)

Consider the following statements, based on a positive economic analysis that assumes that all other things remain constant. For each, list one other thing that might change and thus offset the outcome stated.

(a) Increased demand for laptop computers will drive up their price.

(b) Falling gasoline prices will result in additional vacation travel.

(c) A reduction of income tax rates will result in more people working.

Short Answer

Expert verified

(a) Increase in supply will lead to the downfall of the price.

(b) Increase in price of cars.

(c) Decrease in the value of money due to inflation.

Step by step solution

01

Step 1. Positive or Normative Analysis.

Positive analysis refers to descriptive facts and statements whereas Normative analysis is based on the judgments of economic policies.

02

Step 2. The other factor.

(a) The other determinant that can offset the stated outcome is the increase in supply which will lead to the downfall in prices.

(b) The other determinant that can offset the stated outcome is the increase in the prices of cars.

(c) The other determinant that can offset the stated outcome is the decrease in the value of money due to inflation.

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Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters’ surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Markets, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depending on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.

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(b) How would an economist evaluate which is the better model for forecasting electoral outcomes?
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