Question

For each of the following approaches that an economist might follow in examining a decision-making process, identify whether the approach relies on the rationality assumption or on the assumption of bounded rationality:

(a) An economic study of the number of online searches that individuals conduct before selecting a particular item to purchase online presumes that people are interested only in their own satisfaction, pursue their ultimate objectives, and consider every relevant option.

(b) An economist seeking to predict the effect that an increase in a state's sales tax rate will have on consumers' purchases of goods and services resumes that people are limited in their ability to process information about how the sales-tax-rate increase will influence the after-tax prices those consumers will pay.

(c) To evaluate the impact of an increase in the range of choices that an individual confronts when deciding among devices for accessing the Internet, an economic researcher makes the assumption that the individual is unable to take into account every new Internet-access option available to her.

Short answer

(a) Rationality Assumption.

(b) Bounded Rationality Assumption.

(c) Bounded Rationality Assumption.

Step-by-step solution

Step 1. Bounded Rationality

Bounded rationality behavior explains that people are rational but not completely as they do not examine every possible choice given to them but instead sort among the alternatives.

Part (a). Online searches by individuals.

Rationality Assumption.

The individual will consider all the options and also take into consideration self-interest and will the option that is best for him.

Part (b). Increase in sales tax.

Bounded Rationality Assumption.

The state's sales tax will limit individuals' spending and they will choose among the alternatives based on their tax rate and this might sometimes not be the best alternative.

Part (c). Increase in range of choicees.

Bounded Rationality Assumption.

The individual does not take into account every new Internet access and therefore might not be able to make the choice rationally to the full extent as all alternatives are not considered.