5. Behavioral economics Indicate whether each of the following examples of behav

Question

5. Behavioral economics Indicate whether each of the following examples of behavior is consistent with the utility-maximization framework of traditional economics or is better explained by concepts developed by behavioral economists. Consistent with the Predictions of Traditional Economic Theory More Effectively Addressed by Behavioral Economics Example Some people would prefer to spend an hour doing a task tomorrow to half an hour doing a task today, even if the opportunity cost of their time is the same in both cases People at all-you-can-eat restaurants eventually leave, even though they could continue eating for free. Some people treat $65 they earn differently from $65 they win in a random drawing. There are people who pursue a degree in art rather than engineering, even though engineering careers are usually much higher-paying 0

Explanation / Answer

Behavioural economics deals with the effects of different behaviours of human beings on decision making. These decisions are influenced by various psychological, cultural, emotional and social factors. This is also the basis on which it is distinct from classical theory.

Applying the above definition and understanding of behavioural economics, we can answer the given question.

Taking the given subparts as A, B, C, D.

Behavioural Economics - BE

Classical Theory - CT

A) In this example, someone does some work for a longer duration, even if the opportunity cost is the same if he does the same work for the shorter period. This means he's not concerned with the opportunity cost and utility maximisation. Hence, BE.

B) People leave when they have eaten beyond their capacity, meaning utility maximisation. Hence, CT.

C) Ideally, they shouldn't treat $65 differently, from the CT perspective. However, due to the cognitive factors, that they haven't earned the other $65, they think it doesn't value as much as the earned $65. Hence, CT.

D) A simple case of behavioural economics. Psychological factors are affecting the so-called rational decision of choosing an engineering career. Hence, BE.

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