You are engaged in a debate with a behavioral economist who argues that the philosophy of traditional economics is based on a lie: that all consumers are rational. He argues that since all consumers are sometimes irrational, all of the principles of traditional economics must be thrown out. How would you refute his claim? Identify at least one way consumers behave irrationally and at least one way that a principle of traditional economics can still be successfully applied to consumers.

Question

What will be an ideal response?

Answer 1

One example of irrational economic behavior (such as not maximizing utility due to framing, anchoring, the endowment effect, sense of fairness, or lack of self-control) and at least one example of a traditional economic principle that still applies in most cases (such as the law of demand, the law of diminishing marginal utility, the substitution effect, or the income effect). They should successfully show that the law still applies even if the consumer does not behave rationally. For example, even if an auto manufacturer uses anchoring to convince consumers that an excessively high price is fair, the income effect will still apply: given a limited budget, only a limited number of consumers will be able to afford the car. Some consumers who think the price is fair and would buy the car if they had enough money, simply will not be able to buy it.