Professor's economics students are constructing models for how gasoline prices change. Maria's model has very realistic assumptions and is quite complex. Anna's model is less complicated and less realistic. Maria's model correctly predicts gas price
increases 5% of the time. Anna's model predicts correctly 15% of the time. On the basis of usefulness or "goodness," Professor will give which student's model the higher grade and why?
A) Maria's model gets the higher grade because it is more complex.
B) Anna's model gets the higher grade because it is simpler.
C) Maria's model gets the higher grade because it is more realistic.
D) Anna's model gets the higher grade because it predicts accurately more often.
Answer: D
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Suppose you buy a stock that sells for $20. It's expected annual dividend is $2 and you expect its price to be $25 in one year. What is your expected rate of return on the stock?
What will be an ideal response?
A Consumer Price Index (CPI) adjustment overcompensates for inflation because it ignores
A) the income effect when relative prices change. B) the substitution effect when relative prices change. C) that some goods are inferior. D) that the substitution effect may offset the income effect.