Question

Suppose that you are a big fan of the Harry Potter books. You would love to own a copy of the very first printing of the first book, but unfortunately you can't find it for sale for less than \(\$ 5,000\). You are willing to pay at most \(\$ 200\) for a copy but can't find one at that price until one day, in a used bookstore, you see a copy selling for \(\$ 10\), which you immediately buy. Are you being irrational if you keep the copy rather than sell it?

Short answer

No, it's not irrational to keep the book. Given that the highest level of satisfaction or utility for the individual comes from keeping the book rather than the financial gain from selling it, they are behaving rationally in economic terms.

Step-by-step solution

Understanding the situation

In the exercise, the individual has purchased a book that they were willing to spend up to $200 for, but they found it for only $10. The book has a value of $5000 on the market, much higher than what they paid for it. After buying, they are not inclined to sell it, despite its high market worth.

Analyzing the Rationality

Now, it is necessary to understand the concept of rationality in the economic sense. A person is said to be rational if they are trying to maximize their utility, or satisfaction. In the given scenario, the individual gets a higher satisfaction or utility from keeping the book than from selling it, even at the higher price. This is because the utility is influenced by their personal preference, not strictly by the monetary worth.

Interpreting the question

Finally, the question is about whether or not the individual is being irrational for keeping the book rather than selling it. If we follow the assumption that the person derives more utility from possessing the book than from the financial gain, then it's not irrational. This is because rationality is concerned with maximizing one's utility or satisfaction, and in this case, keeping the book provides more satisfaction.

Key concepts

Utility Maximization

Utility maximization is a key principle in economics, important for understanding consumer behavior. It's based on the idea that individuals aim to get the highest level of satisfaction, or 'utility', from their choices and purchases.

Imagine you're at an ice cream shop. You may choose the flavor that gives you the most enjoyment, even if it's not the cheapest option. This is utility maximization in action - selecting the option that offers the greatest satisfaction relative to the cost.

In our Harry Potter book example, utility maximization is seen where the individual values the personal satisfaction of owning the book over profiting from its high market value. Despite the monetary benefit, the joy of owning the first edition surpasses the financial gain. This illustrates that utility maximization isn't about the monetary value alone, but about the personal satisfaction gained from a product or service.

Consumer Preferences

Everyone has their own likes and dislikes, known in economics as 'consumer preferences'. These preferences dictate how people decide among various options, guiding their economic choices.

Let's talk about how you might pick a movie to watch. You might prefer comedies over horror films, and this preference will influence your selection. Similarly, preferences impact decisions like the foods we eat, the clothes we wear, and the books we read.

In relation with the Harry Potter book scenario, our consumer shows a strong preference for the book's sentimental value over its resale value. Those preferences are personal and can outweigh even substantial economic gains. Remember, preferences lead to choices that maximize utility, though not always in terms of money.

Market Value

Market value represents the price at which an asset would trade in a competitive auction setting. It's determined by several factors, including supply and demand, and it can fluctuate over time.

Think of the real estate market - a house in a desirable location might have a high market value due to strong demand. But if the market cools or the area becomes less sought after, the value might drop.

The market value of the Harry Potter book was $5,000, but for our specific collector, this figure was less relevant compared to the utility they obtained from the item itself. Hence, even when an object has a high market value, this doesn't necessarily compel a rational economic agent to sell if their utility is maximized by keeping it.