Initial Publication Date: April 12, 2016
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Cite thisUsing Economic Models: Practice Problems
Problem 1:
Below is a diagram used in Macroeconomics, looking at prices and unemployment for the entire economy.
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- What are the key variables in this model
- What variables are not included.
- How do the variables relate to each other?
The key variables are the inflation rate and the unemployment rate. Other economic variables not in the model include the size of the economy (GDP). Overall the inflation rate falls when unemployment increases. That is, they are inversely related most of the time.
Problem 2:
Below is a diagram used in Microeconomics, looking at the behavior of an individual business firm.
|
Your firm advertises |
Your firm does not advertise |
| Competitor advertises |
Your profit $5 million
Competitor profit $5 million
|
Your profit $1 million
Competitor profit $10 million
|
| Competitor does not advertise |
Your profit $10 million
Competitor profit $1 million
|
Your profit $8 million
Competitor profit $8 million
|
- What are the key variables in this model?
- What variables are not included?
- How do the variables relate to each other?
The key variables are whether or not each firm advertises and the profits received by each firm. Not included are the revenues and costs for each firm. In this model, the behavior of each firm affects the profit outcome for the other firm, a key characteristic of game theory.
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