An economist at the University of Alaska at Anchorage has been asked to explain why the price of Alaskan crude oil has fallen recently. In order to develop a model, the professor should take which steps?
A) Identify the problem, develop a model based on simplifying assumptions and test the model to formulate a conclusion.
B) Gather data on crude oil prices and seemingly unrelated variables in order to look for associations, then formulate a hypothesis based on those unexpected associations.
C) Ask people in Alaska why they are not purchasing oil.
D) None of these. The oil industry is controlled by a cartel; therefore price changes in the industry cannot be explained using economic theories.

Question

Quizplus · Accepted Answer

The economist should first identify the problem of the falling price of Alaskan crude oil and develop a model based on simplifying assumptions. Then, the model should be tested to formulate a conclusion. This approach is the basic scientific method for analyzing economic issues. Gathering data on unrelated variables (B) and asking people why they are not purchasing oil (C) may be helpful in certain cases, but they are not the best approach for explaining a specific market phenomenon like the falling price of Alaskan crude oil. The statement in option D is incorrect, as prices in the oil industry are influenced by supply and demand and can be explained using economic theories.

An Economist at the University of Alaska at Anchorage Has