Chapter 1, Problem 2AA

To determine

To discuss: The use of economic model to help business owners make decisions.

Explanation of Solution

An economic model is a representation that is useful in predicting economic behavior in real life. A businessman shall analyze the economy as to what the consumers are looking for in the market. They should check the statistics regarding the goods that have a high demand in the market. This means the buying behavior of the consumer is of utmost importance because a consumer may be willing to tradeoff money for good A, while the same consumer might not feel trading money for good B. Accordingly, a hypothesis or a guess should be made. Considering the guess, the decision-makers or the analyst shall prepare a production possibility curve from the producers’ point of view and compute the opportunity cost of producing good A more than good B. After appropriate analysis, the business owner shall consider producing good A instead of good B, if it proves to be efficient and profitable for the business as well.