AN ASSIGNMENT ON

PG 51 number 1, 5 and 6

Page 112 number1 and 2

BY:

ANTE, PRECIOUS SUNNY

REG NO: 10089897DC

MATRIC NUMBER: 21/081144012 a

DEPARTMENT OF ACCOUNTING

FACULTY OF MANAGEMENT SCIENCES

SUBMITTED TO

ASSOC. (PROF). BARR LIONEL EFFIOM (CNA)

(COURSE LECTURER)

DEPARTMENT OF ECONOMICS

FACULTY OF SOCIAL SCIENCES

UNIVERSITY OF CALABAR, CALABAR

IN PARTIAL FULFILLMENT OF THE COURSE REQUIREMENTS ON MICRO

ECONOMICSTHEORY( ECO 231)

SEPTEMBER, 2023.

1) An economic model is a simplified description of reality designed to yield hypothesis about economic
behavior that can be tested. An economic model is that it is necessarily subjective in design because
there are no objective measures of economic outcomes. Different economists will make different
judgments about what is needed to explain their interpretations of reality.

There are two broad classes of models- theoretical and empirical. Theoretical models seek to derive
verifiable implications about economic behavior under the assumption that agents maximize specific
subjects to constraints that are well defined in the model.

In contrast, empirical model aim to verify the qualitative predictions of theoretical models and convert
these predictions to precise, numerical outcomes.

STEPS INVOLVED IN BUILDING AND TESTING A MODEL

 Define the purpose of your model, the problem you are trying to solve.

Deciding the assumptions to be made. After defining the terms of the model, then you formulate a set
of assumptions.

 To collect data:

The third step is to collect data, enumerate and classify the necessary data for estimating the
parameters of the model.

 Derive logical deductions:

The next step in the process is one of logical deductions whereby various implications of
assumptions are discovered and identified.

 Testing the model empirically.

2) Empirical testing is defined as any study whose conclusions are exclusively derived from concrete,
verifiable evidence. The term empirical basically means that it is guided by scientific experimentation or
evidence.

This research/ testing is found on the view that direct observations of phenomena is a proper way
to measure reality and generate truth about economic models.

WHY IS A MODEL THAT CANNOT BE EVALUATED EMPIRICALLY NOT CONSIDERED A SATISFACTORY

MODEL
One of the main reasons why a model that cannot be evaluated empirically is not considered
satisfactory is that it cannot be tested against real-world data. If a model cannot be tested, it is
impossible to determine whether it is accurate or useful. Additionally, without empirical evaluation, it is
difficult to know if the assumptions and relationships in the model are reasonable or realistic. Models
that cannot be empirically evaluated may also be less credible and more likely to be questioned by
experts in the field. As such, it is important for economists to ensure that their models can be
empirically evaluated before using them to inform policy decisions.

In addition to the issues mentioned above, a model that cannot be evaluated empirically is not
considered a satisfactory model because it does not allow for learning and refinement. In order for a
model to be useful, it must be able to be updated and improved based on new information and
feedback. Without empirical evaluation, there is no way to know if a model is working as intended or if it
needs to be revised. Empirical evaluation also helps to ensure that models are robust and can withstand
scrutiny from other economists. This is critical for ensuring the credibility and usefulness of economic
models.

USES OF ECONOMIC MODEL

 Forecast economic activity in a way in which conclusions are logically related to assumptions.

Proposing economic activities to modify future economic activity.

 Presenting reasoned argued to politically justify economic policy at the national level, to explain
and influence company strategy at the level of the firm, or to provide intelligent device for
household economic decisions at the level of household.

Planning and allocation, in the case of centrally planned economics, and on a smaller scale in logistics
and management of business.

 In finance, predictive models have been used for trading. For example, emerging market bonds
were often traded based on economic models predicting the growth of the developing nations
issuing them.

LIMITATIONS OF ECONOMIC MODELS

 Pure theoretical models do not provide full expectations or correct predictions of the
phenomenon under the study.

They tend to neglect those factors that proves difficult to quantify.

 The Mathematical expression of the model may lack relevance and realism.
When they are applied to real life economic situations, they are selective, abstract and arbitrary. Thus, a
model is unrealistic since it leaves out many of the elements that operate in actual economics.

 The use of econometrics in model building has given rise to problems of identification and
random disturbances.

3) Examine the following:

 Indifference curve:

This is a curve that slopes downward from left to right, which shows the various
combinatcombinations of two goods (X and Y)that yields equal amount of satisfaction in the consumers. In an
indifference curve, when it is higher it represents high level of satisfaction.

 Budget line:

A budget line is a straight line graph that shows the various combinations of goods a consumer
purchases given the prices of the goods and the income of the consumers. A consumer does not consume in
extremes but consumes in averages.

 Compensatory budget line:

This is obtained by adjusting income in a way such that at the new prices, the original level of utility
is obtained. The slope of the compensatory budget line is the same as that of the new level.

ASSUMPTIONS OF ORDINAL UTILITY THEORY

 Rationality of the consumers.

Ordinal measurements

 Transitive

Consistency

 Non satiety

D) Marginal rate of substitution:

 This simplifies the rate at which a consumer gives up one good in preference to another.

E) ICC and kind of goods:

ICC means income consumption curve. The shape of an ICC depends on whether both the goods are normal
i.e non inferior, or whether one of them is normal, and the other one is inferior. If both goods are normal,
then as the money income of the consumer rises , prices remaining constant, he would be buying both the
goods in larger quantities.