How do economists try to disentangle cause and effect?
What will be an ideal response?
Economists use models to understand some aspect of the economic world. Testing the predictions of models makes it necessary to disentangle cause and effect. To overcome this problem, economists have three methods of testing their models: Using a natural experiment, using a statistical investigation, and using economic experiments. A natural experiment is a situation that arises in the ordinary course of life in which one factor being studied varies and the other factors are the same. This method allows the economist to focus on the effect from the factor that differs between the two situations. A statistical investigation looks for correlations between variables but then determining whether the correlation actually reflects causation can be difficult. An economic experiment puts people into decision making situations and then varies the relevant factors one at a time to determine each factor's effect.
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The tables above show the marginal costs and benefits from production of paper. If the efficient level of output is achieved by imposing a tax on paper producers, the government collects tax revenue equal to
A) $64,000. B) $56,000. C) $72,000. D) $48,000.
Using the HO model, assume that the United States is capital abundant and Mexico is labor abundant. If soybeans are capital intensive and avocados are labor intensive,
A) Mexico will produce more soybeans once trade is introduced. B) the United States will produce more avocados once trade is introduced. C) avocado prices in the United States will fall once trade begins. D) soybean prices in Mexico will rise once trade begins.