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Chapter 1: Q 20 (page 16)

Sebastian is a financial analyst who is convinced that his clients do not always make choices that are consistent with their long-term objectives. He has also determined that his clients do not consider every relevant choice and often fail to act in their own self-interest. Does Sebastian perceive that his clients' behavior accords with the rationality assumption or the assumption of bounded rationality?

Short Answer

Expert verified

Sebastian perceives that his clients' behavior accords with the assumption of bounded rationality.

Step by step solution

01

Step 1. Assumption of bounded rationality.

Bounded rationality is based on the rule of thumb that is they make choices among the alternatives without considering their self-interest.

02

Step 2. Reason

Sebastian perceives that his clients' behavior accords with the assumption of bounded rationality. The clients do not make choices based on long-term objectives and many of their choices do not take into account self-interest.

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Most popular questions from this chapter

Why might the rationality assumption explain why even a chicken farmer who has absolutely no humanitarian concern for chickens might seek to maintain very comfortable conditions for the birds?

Define economics. Explain briefly how the economic way of thinking—in terms of rational, self-interested people responding to incentives—relates to each of the following situations.

(a) A student deciding whether to purchase a textbook for a particular class.

(b) Government officials seeking more funding for mass transit through higher taxes.

(c) A municipality taxing hotel guests to obtain funding for a new sports stadium.

One of your classmates, Sally, is a hardworking student, serious about her classes, and conscientious about her grades. Sally is also involved, however, in volunteer activities and an extracurricular sport. Is Sally displaying rational behavior? Based on what you read in this chapter, construct an argument supporting the conclusion that she is.

Suppose that the government has raised by $10 a per-carat tax rate it imposes on diamonds in an effort to influence the production of these particular goods by each of the firms that produce them and purchases by individual consumers. Would we apply microeconomic or macroeconomic analysis to analyze this policy action?

Which of the following predictions appear(s) to follow from a model based on the assumption that rational, self-interested individuals respond to

incentives?

(a) For every 10 exam points Myrna must earn in order to pass her economics course and meet her graduation requirements, she will study one additional hour for her economics test next week.

(b) A coin toss will best predict Leonardo’s decision about whether to purchase an expensive business suit or an inexpensive casual outfit to wear next week when he interviews for a high-paying job he is seeking.

(c) Celeste, who uses earnings from her regularly scheduled hours of part-time work to pay for her room and board at college, will decide to buy a newly released DVD this week only if she is able to work two additional hours.

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