Explanation Economy is considered to be rational because the consumers always try to maximize their self-interest from the economy. However, there are times when the consumers act purposefully, which necessarily do not maximize their self-interests. Such actions are known as the predictable irrationality. In this case, the respondents were made into two groups and befo...

Predatory irrational behavior.

Microeconomics

10th Edition

ISBN: 9781259655500

Author: David C Colander

Publisher: McGraw-Hill Education

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Chapter 21, Problem 2IP

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Predatory irrational behavior.

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After the holiday season, many of us find ourselves thinking, “What will I do with another case for my iPad?” Often, both the gift giver and gift receiver could be made better off (that is, receive a higher level of utility or happiness) if cash had been given instead. To understand the economic rationale behind this, economists turn to the basic consumer theory model of budget constraints and indifference curves. Recall that an indifference curve maps out all possible consumption bundles of goods that yield the same level of utility to a given consumer. Indifference curves tell us nothing about what we can afford, but rather tell us how happy a particular bundle will make us. On the other hand, a budget constraint shows the consumption bundles that we can buy given our income and the prices of goods. Similarly, a budget constraint says nothing about what we would like to buy, but rather what we can afford. Suppose you consume only two types of goods: magazines and food. You have $300…
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