One Reason Why Economists Often Use Models in Their Analysis

question 243

Multiple Choice

One reason why economists often use models in their analysis is that

• A) a model helps us to understand, explain, and predict economic phenomena in the real world.
• B) a model accurately pictures every detail of the real world economy.
• C) a model relates to individual thought processes rather than behavior.
• D) it is relatively easy to perfectly specify a model.

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Definitions:

Average Accounting Return

The ratio of average net income to average invested capital, often used in financial analysis to assess investment attractiveness.

Profitability Index

A financial metric that calculates the ratio of the present value of future cash flows from an investment to the initial investment cost, used to evaluate the desirability of projects.

Present Value

Present value refers to the current value of a future amount of money or series of cash flows, calculated using a specific rate of return.

Net Present Value

A calculation used to assess the profitability of an investment, considering the difference between the present value of cash inflows and outflows over a period of time.