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Chapter 1: Q 9 (page 15)

Under what circumstances might people appear to use rules of thumb, as suggested by the assumption of bounded rationality, even though they really were behaving in a manner suggested by the rationality assumption?

Short Answer

Expert verified

Under the situations of change in the environment.

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. Reason

People use the assumptions of bounded rationality in situations of change in the environment. The change in environment may lead the decision-maker to adopt it. The decision-maker may use similar methods or repetitive applications when there is a familiar change in the environment.

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Most popular questions from this chapter

Why does the assumption of bounded rationality suggest that people might use rules of thumb to guide their decision-making instead of considering every possible choice available to them?

One of your classmates, Sally, is a hardworking student, serious about her classes, and conscientious about her grades. Sally is also involved, however, in volunteer activities and an extracurricular sport. Is Sally displaying rational behavior? Based on what you read in this chapter, construct an argument supporting the conclusion that she is.

Write a sentence contrasting positive and normative economic analysis.

Explain, in your own words, the rationality assumption, and contrast it with the assumption of bounded rationality proposed by adherents of behavioral economics.

For each of the following items, state whether a direct or an inverse relationship is likely to exist.

(a) The number of hours you study for an exam and your exam score.

(b) The price of pizza and the quantity purchased.

(c) The number of games the university basketball team won last year and the number of season tickets sold this year.
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