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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

Sebastian is a financial analyst who is convinced that his clients do not always make choices that are consistent with their long-term objectives. He has also determined that his clients do not consider every relevant choice and often fail to act in their own self-interest. Does Sebastian perceive that his clients' behavior accords with the rationality assumption or the assumption of bounded rationality?

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

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

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.

Identify the three basic economic questions and the two opposing sets of answers.
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