Question

The traditional economic framework assumes that people make rational economic decisions, that is, that they act in ways that maximize their utilities. However, behavioral economists have found evidence that is inconsistent with economists’ rationality assumptions.

Which of the following is an example of evidence of irrational behavior? (Note: Read carefully.)

a. Some stock market investors rush to invest their money when stock prices are rising rapidly.

b. Some people are willing to drive an extra mile to save $10 on a $50 purchase but not to save $5 on the same purchase.

c. A lower price tends to increase the number of buyers of a commodity.

Answer 1

Behavioural economics attacks the very notion of rationality found in neoclassical school of thought. The behaviour of the consumer is not always profit maximizing. Option a and b are correct. When stock prices are low, investment provides higher yielding which is opposite to option a and option b also implies the behaviour not caring about the monetary gain.