Question

In: Economics

I just want a simple example for each one of the following. But please DO NOT...

I just want a simple example for each one of the following. But please DO NOT copy from anywhere.

1. Ignoring Nonmonetary Costs

2. failing to Ignore Sunk Costs

3. Being Unrealistic about Future Behavior.

Those are three common mistakes that behavioral economics says consumers often make.

DO NOT COPY,

Solutions

Expert Solution

1.The concept of ignoring Non monetary costs is associated with endowment effect.

That is people's tendency of unwillingness to sell a good they already own even if offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

For example:
Credit cards companies do not allow stores to charge a fee if a consumer pays with a credit card but allow stores to provide a discount if they pay in cash.The credit card company is relying on the fact that not receiving a discount is nonmonetary opportunity cost.Therefore, likely to be ignored by consumers - but a fee is a monetary cost that people will take into account.

2.Sunk cost is that cost which has been already paid but cannot recovered.Failing to ignore sunk cost can explained as once we have paid the money and that money cannot get it back.And we should ignore that money in future decisions.

For Eg:if we have already paid for enjoying any commodity we try to consume that commodity fully.That is if we paid to eat any food.we will eat it fully even if we don't want because we had already paid for that. Similarly if we have planned to watch a movie and we paid fo the tickets which is not refundable then we must watch it.

3.Because people consider present situation more importantly than future.they think that a lot today and not tomorrow.Similarly they say that they will a lot today and not a lot tomorrow.Hence people make inconsistent decisions with long run intentions.

For example:today give up food for future diet.It is hard to give up at present liked things for the future.


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