Initial Publication Date: April 12, 2016

Using Economic Models: Practice Problems

Problem 1:

Below is a diagram used in Macroeconomics, looking at prices and unemployment for the entire economy.

  1. What are the key variables in this model
  2. What variables are not included.
  3. How do the variables relate to each other?

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

  1. What are the key variables in this model?
  2. What variables are not included?
  3. How do the variables relate to each other?