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Chapter 1: Q 6 (page 15)

Recently, a bank was trying to decide what fee to charge for 鈥渆xpedited payments鈥濃�攑ayments that the bank would transmit extra-speedily to enable customers to avoid late fees on cable TV bills, electric bills, and the like. To try to determine what fee customers were willing to pay for expedited payments, the bank conducted a survey. It was able to determine that many of the people surveyed already paid fees for expedited payment services that exceeded the maximum fees that they said they were willing to pay. How does the bank鈥檚 finding relate to economists鈥� traditional focus on what people do, rather than what they say they will do?

Short Answer

Expert verified

The reaction is based on bounded rational behavior.

Step by step solution

01

Step 1. Bounded Rational Behavior.

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.

02

Step 2. The bank's finding.

The bank's finding shows that the people show bounded rational behavior. Despite being given various choices agree to pay more than their willingness by a simple method.to make a decision.

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Most popular questions from this chapter

Consider two models for estimating, in advance of an election, the shares of votes that will go to rival candidates. According to one model, pollsters鈥� surveys of a randomly chosen set of registered voters before an election can be used to forecast the percentage of votes that each candidate will receive. This first model relies on the assumption that unpaid survey respondents will give truthful responses about how they will vote and that they will actually cast a ballot in the election. The other model uses prices of financial assets (legally binding IOUs) issued by the Iowa Electronic Markets, operated by the University of Iowa, to predict electoral outcomes. The final payments received by owners of these assets, which can be bought or sold during the weeks and days preceding an election, depending on the shares of votes the candidates actually end up receiving. This second model assumes that owners of these assets wish to earn the highest possible returns, and it indicates that the market prices of these assets provide an indication of the percentage of votes that each candidate will actually receive on the day of the election.

(a) Which of these two models for forecasting electoral results is more firmly based on the rationality assumption of economics?

(b) How would an economist evaluate which is the better model for forecasting electoral outcomes?

Why might the rationality assumption explain why even a chicken farmer who has absolutely no humanitarian concern for chickens might seek to maintain very comfortable conditions for the birds?

Suppose that the government has raised by $10 a per-carat tax rate it imposes on diamonds in an effort to influence the production of these particular goods by each of the firms that produce them and purchases by individual consumers. Would we apply microeconomic or macroeconomic analysis to analyze this policy action?

Evaluate the role that rational self-interest plays in economic analysis.

Calculate the slope of the function you graphed in Problem A-6.
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