tut 6 on chapter 8 MEMO

# tut 6 on chapter 8 MEMO - Tutorial 6 on Chapter 8 [You must...

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Tutorial 6 on Chapter 8 [You must hand in questions 3, 4 and 5] 1. Mary will drive across town to take advantage of a 40% sale on cosmetics in order to buy a mascara that usually costs R40, but will not do so to take advantage of a 5% off sale on a R2000 ipod. Assuming that her alternative is to pay full list price for both products at the shop across the road from her house, is her behaviour rational? Answer to question 1 : Mary should drive across town if and only if the amount she saves is greater than the cost of the drive. In the 5%-off ipod sale she would save R100. She would save only R16 in the 40%-off sale on the mascara. And yet she makes the trip in the latter case but not in the former. Her behavior is thus irrational. 2. Margaret has decided to open a new savings account. There are two banks in her neighborhood. ABSA offers 6% interest and a free DVD player with each new account. FNB offers 6½ interest but no free DVD player. Suppose the ½ percent is just enough to offset the price of the DVD player after six months, and suppose she has no immediate need for the DVD player. She plans to use it as a gift to her niece who is getting married in six months time. Which bank will she choose if she applies the principles of hedonic framing? What if she is rational? Answer to question 2 : If Margaret applies the principles of hedonic framing, she will choose the bank with the 6% interest rate and a DVD player, since in this case the segregated gains are weighed more heavily than the one large single gain. But if Margaret is rational, she will be indifferent to either bank. 3. Heather is having difficulty choosing between two tennis racquets, A and B. As shown in the diagram, B has more power than A, but less control. According to the rational choice model, how will the availability of a third alternative – racquet C – influence Heather’s final decision? If Heather behaves like most ordinary decision makers in this situation, how will the addition of C to her choice set matter?

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## This note was uploaded on 05/23/2011 for the course ECON 203 taught by Professor Jules during the Spring '11 term at University of Cape Town.

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tut 6 on chapter 8 MEMO - Tutorial 6 on Chapter 8 [You must...

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