Econ 304 Summer 2012Problem Set #1 Due by 11:59 PM MDT June 15NAME:________________________1. (3...

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Econ 304 Summer 2012Problem Set #1 Due by 11:59 PM MDT June 15NAME:________________________1. (3 points each part)According to the textbook, natural scientists often conduct research via controlled experiments,whereas macroeconomists typically rely on natural experiments.a. What is a controlled experiment, and how does it differ from a natural experiment?b. Why are controlled experiments considered to be preferable for scientific research?c. Why can't macroeconomists typically perform controlled experiments?2. (5 points)How often does the price you pay for a haircut change? What does your answer imply about theusefulness of market-clearing models for analyzing the market for haircuts?3. (4 points each part)Use the table below to answer the following questions:Year# of ComputersSoldPrice PerComputer# of AutomobilesSoldPrice PerAutomobile XXXXXXXXXX,000 $6,000 1,000,000 $12,0002010 5,000,000 $2,000 1,500,000 $20,000a.Nominal GDP in any year is calculated by multiplying the quantity of each final product sold byits price an summing over all final goods and services. Algebraically, this can be written aswhere andrepresent the price and quantity sold of the ith final good or service.Assuming that all computers and automobiles are final goods, calculate nominal GDP in 2000and in 2010.b.Calculate real GDP in 2010 using 2000 as the base year.c.Calculate the percentage change in real GDP between 2000 and 2010 using 2000 as the baseyear.d.Calculate real GDP in 2000 and 2010 using 2010 as the base year.e.Calculate the percentage change in real GDP between 2000 and 2010 using 2010 as the baseyear.f.Explain why your answers to Parts c and e where different.4. (4 points each part)Use the table below to answer the following questions:Year# of Loaves of BreadSold Price Per Loaf# of AutomobilesSoldPrice PerAutomobile XXXXXXXXXX,000 $10 100 $50,000 XXXXXXXXXX,000 $20 120 $60,000a.Using the year 2000 as the base year, compute the following statistics for each year: nominalGDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as theCPIb.How much have prices risen between 2000 and 2010? Compare the answers given by theLaspeyres and Passche price indexes. Explain the differencec.Suppose you are a senator writing a bill to index Social Security and federal pensions. That is,your bill will adjust these benefits to offset changes in the cost of living. Will you use the GDPdeflator or the CPI? Why?

David · Accepted Answer

Solution to Question 1 
Part a 
  A controlled experiment is a scientific investigation undertaken under controlled 
conditions specific to the experiment. Under such an experiment there are usually two groups 
which are compared to draw scientific conclusions. One of the groups which under goes the 
experiment is the ‘experiment group’ while the other, who gets the placebo, is called the 
‘controlled group’. Both the experiment group and the controlled group are put to same 
conditions so that the effect of some variable, which are independent, can be studied. 
On the other hand a natural experiment is one in which the variables are not controlled. 
They are used to study the simultaneous natural effect of a number of variables at a time. Such 
experiments help in study design where controlled experimentation is difficult.  The problems of 
disciplines like economics, epidemiology etc. makes use of natural experimentation. 
The major difference between controlled and natural experiments is that the natural 
experiments do not require laboratory conditions and simply requires observational apparatus. 
An investigator would just observe the naturally occurring events, make statistical records and 
analyze the data to draw conclusions regarding correlation between different events. 
Part b 
Controlled experimentation is used over a natural experimentation for scientific research 
due to the following reasons: 
 A controlled experiment is more useful in a comparative analysis to draw 
conclusions regarding the effect of some specific factors. 
 A controlled experiment is more specific and result oriented as compared 
to a natural experiment. This is due to the fact that the investigator focuses on fewer 
variables and can control the conditions under which the experiment takes place. 
 Conducting sub experiments is easier in the case of controlled 
experiments. For example the investigator can alter the independent and the controlled 
variable to draw supplementary conclusions. 
 Natural experiments cannot be used to conduct stimulus tests.
Part c 
Economics is often been criticized for being a dismal science because of the inability of 
the economists to perform controlled experiments. The macroeconomic theory formulation 
requires the observation of the economic behavior of millions of people across economies or 
over decades for the same economy and study of economic variables like demand, supply, 
general price level, inflation, poverty, unemployment, per capita income, government policies, 
GDP, exports-imports, money supply, currency exchange rates etc. and their correlation. Such 
variables are beyond the control of laboratory apparatus.

Econ 304 Summer 2012 Problem Set #1 Due by 11:59 PM MDT June 15 NAME:________________________ 1. (3 points each part) According to the textbook, natural scientists often conduct research via...

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