imply constrained maximization. are realistic assumptions. are assumptions that may yield testable implications. A and C above.

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1 S.6 Economics Methodology Selfishness and scarcity imply constrained maximization. are realistic assumptions. are assumptions that may yield testable implications. and above Which of the following statements about an economic theory is INORRET? useful theory must have refutable implications. useful theory must be conceivably wrong. theory is useful if its postulates are observable. useful theory can have unrealistic assumptions Economic theory is useful because It is proved by evidence. It is refuted by evidence. It is refutable by evidence but not refuted. Its assumptions are realistic. The law of demand is useful because When the price of a good goes up, its quantity demanded always goes down. Refutable implications can be derived from this law. Its assumption is realistic. The law is asserted, not derived. Saying that a person maximize utility may seem an elaborate camouflage to hide our ignorance; for it would appear that whenever a person voluntarily does anything, he can be said to be maximizing his utility. This claim is correct and because of it, economists no longer use a utility theory. This claim would be correct if economists could not specify what entities are good and the relative costs of acquiring them. This claim is incorrect only to economists. This claim is incorrect because it does not make sense Which of the following is NOT an attribute of a useful economic theory? The theory is always true. The implication of the theory are refutable by facts The postulates may be unreal. The theory is logically consistent useful theory should lways be true Have testable implications. Have observable postulates. Have an indefinite number of possible outcomes Which of the following is tautology? The area of Victoria Park is greater than that of Kowloon Park. Visitors should not litter in public areas. The quantity of vegetables supplied increase because more quantities are available for sale. The price of vegetables increases because the cost of production rises.

2 99 2. The explanatory power of an economic theory will be weakened if The theory is consistent with maximizing behaviour. The number of the test conditions is increased. The postulates of the theory are not observed. The real world cannot be fully described Which of the following is a refutable statement? When an individual s preference changes, his consumption behaviour also changes. n increase in the number of university graduates will drive up the market wage rate. demand curve can be either upward sloping or downward sloping, depending on whether the good is a Giffen good or not. n inferior good has a negative income effect Which of the following statement is NOT refutable? If price falls, the quantity transacted will fall. If price falls, the quantity transacted will increase. If income increases, the quantity transacted will increase. If the price elasticity of demand for a good is unitary, the percentage change in price will be the same as the percentage change in the quantity demanded theory with an indefinite number of possible outcomes Is more general in application. Is easier to refute. Has no refutable implication. Is more realistic Which of the following statement is testable? n increase in the available quantity of a good will lead to a reduction in it s market price, other things being equal. When two individuals have different marginal use values over a good, they will trade. Marginal use values of buyers and sellers are equal in market equilibrium. The demand curve is downward sloping Whatever an individual does, he is maximizing utility. Which of the following about this statement is correct? This is an empty statement. The statement is true by definition The statement as it stands is not testable ll of the above useful theory May not be refutable by facts. Must fully describe the real world. May start out from a tautology. Must always be true. Which of the following is a tautological statement? The price of seafood will go up if its supply is reduced. ond price will be affected by interest rate fluctuation.

3 Market equilibrium will be attained when the quantity demanded is equal to the quantity supplied. The crime rate will fall when heavier penalty is imposed on criminals theory is said to be useful if it succeeds in explaining or interpreting observations. theory is NOT useful if Its implications are refutable by facts. Its assumptions are unrealistic. It is always true. It is logically consistent. necessary condition for a theory to be useful in explaining behaviour is That it is always true. That it must be conceivably false. That it is rejected by facts some of the time. That it is supported by facts most of the time. tautological statement is NOT refutable because It is conceptually useless. It may generate no theory. It is always true. It cannot be observed. Individual maximization subject to constraints is postulate. The nature of mankind. True for some societies but not for others. useless statement. Which of the following statement is testable( i.e. refutable by facts) as it alone stands? If the price of a good goes down, its quantity demanded goes up. If tuition fees are high enough, schools will have no students. When a person jumps out of the window, he is maximizing utility. The quantity of a good sold is equal to the quantity of that good purchased. testable implication requires The support of an unrealistic theory. t least one observable variable. t least two observable variables. No observable variables because observations are always subjective in nature If the number of test conditions specified for a theory increases,. the theory will become more general in explaining behaviour.. the explanatory power of the theory will be more restrained.. the empirical usefulness of the theory will not be affected.. the theory will become a tautology Economic theory is useful if it contains. at least two observable variables.. implications refutable by facts.. postulates that are themselves testable.. implications refuted by facts

4 07 2 rmen lchian once illustrated the methodology of science by predicting the density of leaves on trees, asserting that leaves would move around at midnight to maximize sunlight the next day. Which of the following is correct? lchian is right because leaves do move around. lchian is right in that a useful theory need not be realistic. lchian is wrong because there are rarely trees and leaves in deserts where sunlight is plentiful. lchain is right because he provided a realistic description of the situation Which of the following is tautology? The demand for eater is less than the demand for beef. The more substitutes that are available, the higher the price elasticity. consumer s total expenditure remains constant over time. He is said to be selfish because he is asserted to be selfish Which of the following is refutable? Price does not change when quantity demanded and quantity supplied of a good are equal. The market is in equilibrium. Indifference curves are convex to the origin. With price controls there may be shortages or surpluses Would there still be economics if the concept of utility had never been invented? nd would there still be economics if the postulate of constrained maximization had never been invented? (8) 07 1 What is normative economics? In what exact sense is it not a science? (5) 07 6 In a one-man economy there is scarcity, but not shortage. o you agree? Explain. In a society there is no shortage. O you agree? Explain. (8)

5 nswer Would there still be economics if the concept of utility had never been invented? nd would there still be economics if the postulate of constrained maximization had never been invented? (8) Economics would still exist if there had not been the concept of utility, because it can be substituted by others. Economics is an empirical science based on the self-interest postulate in order to explain and predict human behavior. To explain and predict, economists select/ relevant postulates and test conditions, and test the implications against empirical evidence, thus to construct a theory. That means, as long as testable and refutable implications can be derived, whatever postulate is selected does not matter. ctually, very often economic problems are solved by other observable entity such as wealth, income consumer surplus, rent rather than utility since utility is not readily quantifiable. Therefore, there would still be economics if the concept of utility had never been invented, though it might not have developed so well. However, economics would not come into being without the postulate of constrained maximization. The axiom of economic resting on which economists construct a theory is that people maximize under constraints, e.g. money, time. If such a fundamental had not been there, economic theories can be based on nothing. That is, there will be no restrictions on behavior. Thus, the implications derived would lose the power to explain and predict. s such, economics would fail to exist as a science but only a tautological subject What is normative economics? In what exact sense is it not a science? (5) Normative economics concerns what ought to be, involving value judgment. It is not a science because it contains no testable implications- therefore has no explanatory power. On the other hand, positive economics studies what is. This implies the existence of some theories which contain propositions such as if then, with the logical consequence of if not then not. positive science is regarded as empirical in nature if such propositions or implications are testable, which requires that both and are observable entities.

6 07 6 In a one-man economy there is scarcity, but not shortage. o you agree? Explain. In a society there is no shortage. o you agree? Explain. (8) When more is preferred to less, scarcity is implied. This situation certainly exists in a one-man economy, because that one man must be observed to sacrifice something to get something else. Whenever sacrifice is observed, scarcity is implied. There is no shortage even in a society, for the simple reason that all markets must ve cleared in order to produce equilibrium situations. If equilibrium is not attained, no theory is implied, hence economics cannot explain behavior. If the price of a good is controlled to below the market price, the alleged presence of the shortage, hence disequilibrium, simply means that we have no theory. It is not a fact. If queuing occurs, equilibrium may again be derived as a matter of routine, but then the market is again cleared hence no shortage.