Behavioral economists examine choices that consumers make that are not economically rational. Economists generally assume that people are rational; that is, they weigh the benefits and costs of an action and choose an action only if the benefits outweigh
the costs. Why do consumers not act rationally when the result is that they make themselves worse off?
What will be an ideal response?
Most people who do not act rationally do not realize that their actions are inconsistent with their goals. Another way to explain this is that they do not weigh the benefits and costs of their decisions correctly. Three mistakes are commonly made. First, while people usually account for the monetary costs of their choices they often ignore the nonmonetary opportunity costs. Monetary costs are easier to recognize because they call for payments of money, but nonmonetary opportunity costs do not. Second, people fail to ignore sunk costs. Although people may regret spending money for an activity, if the money cannot be recovered it should not factor into making current or future decisions. Finally, people often overvalue the benefit or utility they receive from current choices (for example, smoking) and undervalue the utility they expect to receive in the future (for example, not contracting lung cancer).
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In 2006, the American Association of Retired Persons (AARP) spent over $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is
a. logrolling. b. rent seeking. c. influence peddling. d. redistribution searching.
Suppose Kyle is a liberal and the economy is overheated. Which fiscal policy does he recommend?
a. increase taxes b. decrease taxes c. increase G spending d. decrease G spending e. increase the money supply
If the supply of a good decreased, what would be the effect on the equilibrium price and quantity?
A. Price would increase, and quantity would decrease. B. Price would decrease, and quantity would decrease. C. Price would increase, and quantity would increase. D. Price would decrease, and quantity would increase.
Which of the following would be an asset to a bank?
A. Cash in the vault B. A loan to a university student C. A government security D. All of these responses are correct.