Evaluating Competing Economic Models
An economist is studying how consumers choose which brand of coffee to buy. Two competing models are proposed:
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Model A: This model is based on detailed psychological surveys. It assumes consumers consciously deliberate over factors like ethical sourcing, brand reputation, and packaging design for every purchase. However, this model's predictions about which coffee brands will be top sellers are frequently inaccurate.
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Model B: This model assumes every consumer acts as a perfectly rational agent, instantly calculating a complex utility-maximization formula based solely on price and caffeine content. While this assumption about consumer thought processes is clearly unrealistic, the model consistently and accurately predicts aggregate sales data and market share for different coffee brands.
Based on the reasoning illustrated by the expert billiard player analogy, which model should the economist prefer for the purpose of predicting market outcomes, and why?
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The Economy 2.0 Microeconomics @ CORE Econ
Ch.3 Doing the best you can: Scarcity, wellbeing, and working hours - The Economy 2.0 Microeconomics @ CORE Econ
Introduction to Microeconomics Course
Evaluation in Bloom's Taxonomy
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An economist develops a model of an expert billiard player's behavior. The model assumes the player can instantly calculate the complex physics equations required to sink a ball. According to the 'as if' reasoning illustrated by this analogy, what is the primary justification for using such an unrealistic model?
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Milton Friedman used the analogy of an expert billiard player to explain the 'as if' principle in economic modeling. Match each element of the billiard player analogy to its corresponding concept in economic theory.
According to the expert billiard player analogy, the 'as if' principle suggests that successful economic agents, like expert players, have subconsciously mastered the complex mathematical calculations that underlie their optimal decisions.
An economist creates a model of a firm's pricing strategy, assuming the manager calculates marginal revenue and marginal cost for every product to maximize profit. A critic dismisses the model, arguing that real-world managers use intuition and simple rules of thumb, not complex calculus. Based on the logic of the expert billiard player analogy, what is the most effective defense of the economist's model?
Evaluating Competing Economic Models
The primary conclusion drawn from the expert billiard player analogy is that since the internal thought processes of economic actors are irrelevant, any model that accurately predicts outcomes is equally valid, regardless of how absurd its underlying assumptions are.
Critique of the 'As If' Principle
Applying the 'As If' Principle to Business Decisions