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In: Economics

Which of the following are characteristics of NeoclassicalEconomics? (Select all that apply)individuals use rules...

Which of the following are characteristics of Neoclassical Economics? (Select all that apply)


individuals use rules of thumb


individuals act independently of one another


reference points matter


rational preferences


individuals use mental accounting


firms maximize profits

Solutions

Expert Solution

There are 3 central assumptions in Neo Classical School of thought:

a. People have rational preferences.

b. Individuals maximise utility, firms maximise profits.

c. People acts independently on the basis of full and relevant information.

Lets analyse each case based on above assumptions.

1. Incorrect, individuals do not use rule of thumb as this will not lead them to have rational preferences and maximise utility.

2. Correct, as stated in assumptions.

3. Incorrect, as individuals are rational they will not fall for rational points bias (this means bias where individuals tend to ascertain gains or losses based on some reference point).

4. Correct, as stated in assumptions.

5. Incorrect, Mental accounting is bias in behavioural economics but this theory assumes individuals are rational which means they do not have bias while taking decisions involving economics.

6. Correct, as stated in assumptions.

Rahul Sunny answered 2 years ago
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