Q 10 For each of the following approa... [FREE SOLUTION]

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Chapter 1: Q 10 (page 15)

For each of the following approaches that an economist might follow in examining a decision-making process, identify whether the approach relies on the rationality assumption or on the assumption of bounded rationality:
(a) To make predictions about how many apps a person will download onto her tablet device, an economist presumes that the individual faces limitations that make it impossible for her to examine every possible choice among relevant apps.
(b) In evaluating the price that an individual will be willing to pay for a given quantity of a particular type of healthcare service, a researcher assumes that the person considers all relevant health care options in pursuit of his own long-term satisfaction with resulting health outcomes.
(c) To determine the amount of time that a person will decide to devote to watching online videos each week, an economist makes the assumption that the individual will feel overwhelmed by the sheer volume of videos available online and will respond by using a rule of thumb.

Short Answer

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(a) Bounded Rationality Assumption

(b) Rationality Assumption

Step by step solution

Step 1. Bounded Rationality

Bounded rationality behavior explains that people are rational but not completely as they do not examine every possible choice given to them but instead sort among the alternatives.

Part (a). Apps downloaded on devices.

Bounded Rationality Assumption.

The individual does not consider all the relevant choices and faces limitations which leads to a choice that is not made based on all the observations and is bounded by a few apps.

Part (b). Types of healthcare service.

Rationality Assumption.

The individual considers all the relevant options and takes into account every single healthcare plan and makes the best decision for himself with the full knowledge gained.

Part (c). Watching online videos.

Bounded Rationality Assumption.

The individual will make the decision based on the number of online games and will not consider the opportunity cost of it each week and will not take into account all the relevant options.