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Chapter 20: Q. 20.4- Learning Objectives (page 437)

Discuss why bounded rationality may prevent reaching a true consumer optimum.

Short Answer

Expert verified

Bounded rationality describes how humans make decisions that differ from perfect economic rationality because our rationality is limited by our mental capabilities, the information available to us, and time.

Step by step solution

01

Introduction.

Bounded rationality is a human judgement process in which we seek satisfice rather than optimization. In those other phrases, rather than seeking the best decision possible, we seek the best decision that will suffice.

02

Bounded rationality prevent reaching consumer optimum.

Bounded rationality is the theory that consumers make limited rational decisions due to three major factors: cognitive ability, time constraints, and imperfect information.

Customers, for example, will make suboptimal decisions when ordering at a restaurant because they feel rushed by the waiter.

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Most popular questions from this chapter

Your classmate tells you that he is indifferent between three soft drinks and two hamburgers or two soft drinks and three hamburgers.

a. Draw a rough diagram of an indifference curve containing your classmate's consumption choices.

b. Suppose that your classmate states that he is also indifferent between two soft drinks and three hamburgers or one soft drink and four hamburgers, but that he prefers three soft drinks and two hamburgers to one soft drink and four hamburgers. Use your diagram from part (a) to reason out whether he can have these preferences.

Consider the movements that take place from one point to the next ( Ato Bto Cand so on) along the total utility curve as the individual successively increases consumption by one more unit, and answer the questions that follow.

a. Which one-unit increase in consumption from one point to the next along the total utility curve gencrates the highest marginal utility?

b. Which one-unit increase in consumption from one point to the next along the total utility curve gencrates zero marginal utility?

c. Which one-unit increase in consumption from one point to the next along the total utility curve generates negative marginal utility?

Explain why it must be true, even for someone trying to lose weight, that the last bite of food consumed must have positive marginal utility at a consumer optimum?

The campus pizzeria sells a single pizza for \(12. If you order a second pizza, however, the pizzeria charges a price of only \)5for the additional pizza. Explain how an understanding of marginal utility helps to explain the pirzeria's pricing strategy.

From the data in Problem 20-3, if the price of a cheeseburger is \(2, the price of a bag of french fries is \)1, and you have $1 to spend (and you spend all of it), what is the utility-maximizing combination of cheeseburgers and french fries?
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