In an economic model, assumptions
A. are not important in determining the usefulness of the model.
B. must be applicable to all real-world situations.
C. must be eliminated before being used to make sure the model is realistic.
D. define the set of circumstances in which the model is most likely to be applicable in the real world.
Answer: D
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Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. Moe has just received a job offer that pays $40,000 per year. Moe should:
A. reject the offer if he is risk averse. B. only accept the offer if he is risk-neutral. C. reject the offer regardless of his preference for risk. D. accept the offer if he is risk averse.
Suppose Wave detergent is sold in a monopolistically competitive market. If the price of Wave detergent is currently $6, and the average cost of producing Wave is $4, in the long run we can expect:
A. firms to enter the detergent market and sell products similar to Wave, shifting the demand curve for Wave to the left. B. firms to enter the detergent market and sell product similar to Wave, shifting the demand curve for Wave to the right. C. the producers of Wave to go out of business. D. the producers of Wave to earn economic profits greater than zero.