Printed Page EM-18

Check Your Understanding

  1. Question 1

    Identify the cause of each of the following types of behavior:

    1. Roberto will pay more for the same steak in a restaurant with fancy tablecloths than in a restaurant without them.

      Framing

    2. Karen knows she should stop eating chocolate, but she eats more anyway.

      Bounded willpower

    3. Alesia opens a new hardware store despite market research indicating insufficient consumer demand for the store’s products.

      Excessive optimism

    4. Nelson employs a worker whose family desperately needs the income, even though the worker’s wage exceeds the revenue that worker brings into Nelson’s firm.

      Bounded self-interest

  2. Question 2

    What do experiments with the ultimatum game reveal about the typical participant?

    Strong interests in fairness, and a desire to punish those whose decisions seem unfair

Discussion Starters

  1. Question 1

    Which of your behaviors might be considered irrational? Do you consider sunk costs? Do emotions ever put you on an irrational path?

    Students might discuss situations in which they were led astray from rationality by emotions, framing, sunk costs, satisficing, excessive optimism, bounded willpower, or bounded self-interest. For example, a student might say that she or he broke something or hit someone in a fit of anger, only to regret the action shortly afterwards.

  2. Question 2

    How gullible are you? Do you tend to believe what you hear from your friends and what you read on the Internet? Have you ever learned that you were fooled by these or other information sources?

    Students might discuss misinformation received online, false rumors heard from friends, or misleading information conveyed in political advertisements.

  3. Question 3

    Do you sometimes exhibit altruism? In what instances have you forgone money for the benefit of others?

    Students might discuss donations to charity, volunteer work, or tipping. Do they ever put money in a tip jar at a counter when the clerk isn’t watching? Or do they make sure that receipt of the tip is observed, meaning that they might receive better treatment in return?

  4. Question 4

    Would a product’s effects on the environment influence your decision to buy it? Can you name the greenhouse gases that cause global warming? What sorts of costs weigh against the benefits of obtaining this information?

    The opportunity cost of time and, in some cases, money weighs against the benefits of obtaining information. Seldom do we collect all the available information about a topic because at some point the marginal benefit of additional information outweighs the cost.

  5. Question 5

    As a manager, would you set prices so that they ended in “99”? Why or why not? Does this approach ever work on you as a consumer?

    Students might say that they would set prices that end in 99 because consumers respond to the lower-seeming prices. Some students might find this unethical. Some students might say that the approach works on them, while others might say that they're not so easily fooled.

  6. Question 6

    What evidence have you seen of the failure or success of neoclassical models? Have you noticed changes in the price or quality of goods as the number of competitors changed? Does the quantity of a good demanded decrease as its price increases?

    Students might discuss situations in which the scarcity of time, intelligence, or information affects consumer behavior. Perhaps competition among restaurants increased in their town, but did not result in lower prices in the restaurant market because not enough people knew what the new restaurants had to offer. Or perhaps students have seen urgent needs for medical care prevent consumers from comparing prices across care providers. Students might discuss how increases or decreases in gas prices affect their family's driving habits.
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