Question

For each of the following anecdotes, briefly explain (i) why the described is potentially inconsistent with standard economic theory and (ii) why it is potentially consistent with a behavioral theory we learned in this course.

(a) Some students who were about to buy a ticket to a campus theater group were randomly selected and given a discount. Those who were given the discount were much more likely to buy a ticket for a second showing.

(b) The AARP recently asked a series of prominent lawyers to provide services for retirees at a highly discounted rate of $30 an hour. Very few lawyers agreed to do so. Then, the AARP simply asked the lawyers to volunteer their time for free to help the same retirees. At that point, many lawyers agreed to help out

(c) A bank offers two types of savings accounts, called Gold and Silver. The two types of accounts give the same rate of return, but the Silver account does not allow you to withdraw any money for six months. The bank manager is surprised when many people sign up for the Silver account.

(d) Cab drivers in New York City work longer hours on warm, sunny days (when their per-hour wage is low).

Answer 1

Solution

(a) (i) It  is potentially inconsistent with standard economic theory because the Costs increase (in the form of selecting a sample of people inorder to be discounted and the money that needs to be given as discounts) may be more than revenue increase (Those who were given the discount were much more likely to buy a ticket for a second showing).Decisions whose results are a kind of speculation / or whose results are not definite cannot be considered / taken.

(ii) Consistent with the behavioural theory - as the discounts increases brand loyalty and brand promotion.It may take time for the revenue to rise but it will rise ultimately.It depends on with how much correctness the sample size is chosen and also how large the sample size is.

(b) (i) It  is potentially inconsistent with standard economic theory - Discounted price for the service doesn't match with any economic theory as charity cannot be mixed with earnings.Charity cannot influence the ability of earning. There would always be a trade-off between the two types of activities in terms of effort and/or time spent.

(ii) Consistent with the behavioural theory - Here the charity in the form of free service is clearly seperated from the earning activity.Also now charity component is not re-inforced /made compulsory.Person can choose their commitment to the charity.

(c) (i) It  is potentially inconsistent with standard economic theory - Here Gold and Silver are savings accounts.But the money withdrawal is not allowed in the case which is against the rule of savings account. Money from the savings account can be withdrawn any time ,the same reason for which the interest rates are low when compared to other definite time period deposits).So,bank is earning additonal income through falsly promoting the product as savings account.

(ii) Consistent with the behavioural theory - People think of depositing money when it comes to chosing Fixed deposits.This silver account is projected as a choice/option to them (by introducing it as a kind of a savings account).

(d) (i) It  is potentially inconsistent with standard economic theory - As the per-hour wage is less they should not work for more hours as pay is generally seen as one of the main motivation to work and also the people can choose to work more hours for jobs that have more pay-per hour.

(ii) Consistent with the behavioural theory - Here the taxi-drivers work more hours inspite of low per hour wages becuase of the following reasons

a.Every taxi driver has a constant budget for every month irrespective of the season as the common expenses generally are independent of seasons.So inorder to meet their targeted income they opt to work for more hours to makeup for the lowered pay per hour wages.

b.Eventhough the pay-per wages are low and other jobs with comparitvely high wages are available,the taxi drivers find themselves comfortable in doing their present jobs i.e., taxi-driving.Or they may also be reluctant to move to other jobs.

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