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 the above. 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 follow the steps of identifying the problem, developing a model based on simplifying assumptions, and testing the model to formulate a conclusion. This approach is in line with standard economic analysis and will help the economist to provide a reasoned explanation for the recent fall in prices. Option B is not the most appropriate because looking for unexpected associations is unlikely to provide a robust model, while option C is too simplistic and may not uncover the underlying economic factors driving the fall in prices. Option D is incorrect as there is no evidence to suggest that the oil industry is completely controlled by a cartel, and economic theories can still be used to explain price changes.

An Economist at the University of Alaska at Anchorage Has