Question

Give one example of an experiment that shows how the theory that "people are rational" breaks down. Explain why the results disagree with rationality. (6 points) B I Y A A HTML Editora Ix E315 xX, EE GY 0 12pt Paragra V

Answer 1

People are rational. They aim at maximizing the benefit from consumption, given income and prices. Pipal operates under conditions of certainty. People are rational that means they measure, Calculate, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.

However this theory has limitations. One of the most crucial assumption in the utility analysis is that consumer act rationally in allocating his given money income on goods of his choice. he is expected to be of calculating mind and capable of Weighing to the utilities of the commodity in a find manner. but how many of uscus and wait the utilities when we buy commodities? Most of our purchases are casual, prompted by habit or taste. Often we buy goods under the impact of fashion, custom or advertisement. Under the circumstances it cannot be expected of the consumer to act rationally. it also assumes that the consumer has perfect knowledge of the alternative choices open to him. In reality most of the consumers are ignorant about other useful alternative on which they could spend their income. This makes the act of substitution difficult.