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I'm pretty sure there are a couple of Econ majors or people interested in Economics at TL. Anyway, being the time of year when people are studying for exams, here are two questions I came across a few years ago that I thought were fairly different to the usual and only require a high school level of Economics knowledge. The first question is very easy, the second one took me some more thought.
1. A man stays in a hotel for a night and when the time comes to pay his bill he doesn't have any cash or cards. Instead he writes the hotel manager a check for $100. Said man has beautiful handwriting and the hotel manager can't bring himself to cash the check. He decides to keep it instead. A little time later he goes to buy groceries but realizes he doesn't have any money left, so offers the grocer the $100 check. The grocer accepts the check but is astounded at the copperplate handwriting. He decides to keep it, only using it at a later date when he has no money left to pay for goods/services. And so this goes on with the check never being cashed.
Who paid for the first man's stay in the hotel?
2.
“I should like to buy an egg, please” she said timidly. “How do you sell them?”
“5p for one – 2p for two” the Sheep replied.
“Then two are cheaper than one?” Alice said, taking out her purse.
“Only you must eat them both if you buy two” said the Sheep.
“Then I’ll have one please,’’ said Alice, as she put the money down on the counter. For she thought to herself, “They mightn’t be at all nice, you know.”
- Lewis Carroll, Alice in Wonderland
Is Alice's choice rational?
Edit: My apologies, I should've been more clear about the definiton of rational. I mean rational economic choice, i.e. whatever gives her highest utility.
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16938 Posts
1. Didn't the man pay for this stay at the hotel? <_<
2. Dunno, probably? If she doesn't like the eggs, she'd be wasting both if she buys two, so if she buys one, she'd waste at most one if she doesn't like them. If she does like them, later on she can just buy two at once.
God I suck at economics.
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1.
+ Show Spoiler +He did. His work in signing the check created a thing of monetary value to a large group of people, which he traded for goods. It is the same as if he had traded a painting that he made for the groceries.
2.
+ Show Spoiler +Yes. Can't really put my explanation into words though at the moment.
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1. + Show Spoiler +The grocer is paying for the man's stay in the hotel. It depends who is currently holding onto the "worthless" check.
2. + Show Spoiler +Alice's choice isn't rational. She is increasing the cost at no benefit, or possibly a loss, by puchasing one egg. If the eggs are good or bad she is paying a higher price. Simply, she is paying more and getting less.
Edit: I love how Lemonwalrus and I have completely different answers. 
Edit2: It's very appropriate that your username is Milton Friedman.
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@Durak
Your explanation for #1, although opposite from mine, sounds good, so now I am confused. Is it possible that it works either way?
Edit: On second thought, the hotel manager didn't pay, because the check turned out not to be useless to him since he was able to exchange it for something of value. To him the check was as good as money.
However for #2, couldn't there be a monetary value for the bad taste of an egg?
For instance, say I said that I was going to hit you in the face if you didn't give me $1. You, very rationally, give me $1. In this way, you have put a monetary value on 'not being hit in the face by some citrus mammal jackass' at at least $1. Perhaps similarly Alice believes the value of 'not being forced to eat a possibly not very good egg' at 4 cents or more, which would make her decision rational.
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I just felt like discussing 2 cause it's interesting 
2. Well, it's rational because she might not like the taste and if she bought two, she'd have to finish both. That could potentially be sheer torture! In her opinion, it's better to take the financial hit rather than suffer through potentially eating bad food.
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Nevermind, I didn't read it properly. I agree with your analysis Lemonwalrus. It depends on the value Alice places on the possibility of eating a bad egg.
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Some of you don't seem to understand the wording of question 1. I'm not saying I have the right answer but...
The check is NEVER cashed. It says that explicitly.
1.+ Show Spoiler +Way I see it... man stays... man gives something worth 100 quid (IF YOU CASH IT) in return for his stay. But it never get's cashed, so he doesn't pay. Ever.
Now the hotel owner, as opposed to using money to pay for his groceries, uses the cheque, so he exchanged the charge for the stay for some groceries. He has won nor lost nothing. Take the shop vendor... he exchanged groceries for this cheque, which he will in turn exchange for something else. There is no profit or loss here. The first man never payed for his stay, and people just keep shifting this unpaid debt onto the next person, so on and so forth. It's never paid for.
2.+ Show Spoiler +Even after change in OP.. the question is still too vague.. Are the eggs raw? are they poison? this just brings a million what if's....
Also the question is dumb. It's clear that she made poor value choice 5 for 1 vs 2 for 2, but then you have to weigh in whether she wants to eat two eggs or not, because they might not be nice. I don't see how you can answer this question correctly without better wording, and if that is done the question is no more difficult than what is greater, 1 or 2.
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1.+ Show Spoiler +
I have no idea. Actually, Im not sure if I understood the question properly...
2. + Show Spoiler +
Yes, it is rational. Maybe eggs are a Giffen Good for Alice.
On another point of view, Alice is being safe.
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I updated question 2's definition of rational. Also, I don't have any "official" answers, only what I think is right. So far I don't agree with any of the answers given to question 1, and I see two potential ways to answer question 2, again neither of which really agree with what's been said so far. I'll give my thoughts a little later when I have time to type it all up.
Back to studying 
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1. + Show Spoiler +Whoever is currently holding the check is paying $100 for the check, until someone decides to cash it, then the man is paying for his own stay.
2. + Show Spoiler +I'm not really sure there is a definate answer here. It seems just like a matter of how cautious she is. I don't know how you can make a rational decision regards total utility, when you don't know the marginal utility of each egg.
*edit*
Looking back I think Walrus' answer is the correct one. Although the comparison to a painting might be a little off. If the people who hold decide the beauty of the signiture is worth more than the $100 they would get for cashing the check, then the analogy works, but you still have to factor in the chance that someone will eventually cash the check, which would result in the man paying for his own stay.
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1.+ Show Spoiler +.
The man made a thing with value, the check. So he himself paid for it, because it seems like everyone is accepting this piece of paper. Because they accept it, it can be seen as a currency(?). So the man lost a piece of paper worth of 100$ for paying his bills, even if the check won't be cashed.
2.+ Show Spoiler +The egg may be poisened and two of them could kill you, while one don't. But it's just an assumption. And assumptions are not rational
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+ Show Spoiler +As of now the hotel is unpaid for. Until that cheque cashes and the original guy losses the 100 dollars from his account, no money has actually moved around.
+ Show Spoiler +Wonderland is fucked up and if Alice bought 2 for 2 and only at 1 something would probably come try to kill here. As a weak little girl she made the correct rational choice.
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+ Show Spoiler +Alice made the correct rational decision here, economically speaking, because she had no intention of eating two eggs right there, right now. As a result, one may consider the "two eggs eat now" package to be a different set of goods than the one egg that you may do with what you wish.
Consider it this way: You have $100,000 in liquid capital, are not in debt, do not have kids, and want to buy a car. There are two cars up for sale: One is a Lamborghini (valued at 75,000$) for $75,000. The other is a Ferrari (valued at $150,000) for $25,000. The catch for the Ferrari is, you have to watch someone drop a 200 ton anvil on it from a height of 20 feet. What would you rather buy? The Lamborghini, because the Ferrari would be basically scrap metal and undesirable.
Likewise, in Alice's sense, she has to eat the two eggs raw. This is much less desirable than cooking the damn egg and having scrambled eggs or w/e, so it's a different class of goods than the single egg for 5p.
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1. I'd say the hotel paid for the first man's stay in the hotel. Mainly the hotel manager should have cashed the cheque thereby paying for his stay, but since it was never cashed the hotel provided a service that it was never paid for thus resulting in its loss. Now this is assuming that the hotel manager doesnt own the hotel.(If he did then he paid for it by accepting the chq as cash.)
2. This is difficult because it depends on Alice's own preference or utility on getting a bad egg. if getting a bad egg is worth more than 3p then she is ahead.
In this case id say since Alice refused to buy two then her she valued a bad egg being higher than 3p thus by her only paying 5p for one good egg she is better off. (5p or 2p +A(value of bad egg))
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United States22883 Posts
On April 16 2009 00:13 Milton Friedman wrote:
Edit: My apologies, I should've been more clear about the definiton of rational. I mean rational economic choice, i.e. whatever gives her highest utility.
This is still a problem. Utility could be defined in multiple ways (nourishment, pleasure, etc.) and rational choice theorists have tried to incorporate psycho-analysis into their predictions, such as 'psychological goodness' felt when doing something nice for others. Doing so has made their models watered down at best, and laughable at worst.
For the purposes of economic theory, I would say she didn't act rationally, and that redefining the term 'rational' so that it fits her actions neuters it for all other purposes. Whatever pleasure she gains from the egg is immeasurable, so calling it rational just creates a clusterfuck because any action can be redefined as rational in those terms.
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+ Show Spoiler + The man paid for his own hotel stay, he traded a good that was accepted as liquid cash because people have faith in the piece of paper.
+ Show Spoiler + If the eggs are raw, then Alice's choice is rational because most people do not have strong preferences towards eating one raw egg, let alone two. Most people buy raw eggs to be consumed after being cooked, sometimes with other foods. Therefore Alice is gaining the greatest possible utility by buying only one egg, instead of eating two raw ones at a lower price.
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+ Show Spoiler + 1. I'd say no one did. As it states the cheque never gets cashed so it's out of the circulation system. They are just giving each other freebies in a round about sort of way.
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On April 16 2009 02:00 Jibba wrote:Show nested quote +On April 16 2009 00:13 Milton Friedman wrote:
Edit: My apologies, I should've been more clear about the definiton of rational. I mean rational economic choice, i.e. whatever gives her highest utility. This is still a problem. Utility could be defined in multiple ways (nourishment, pleasure, etc.) and rational choice theorists have tried to incorporate psycho-analysis into their predictions, such as 'psychological goodness' felt when doing something nice for others. Doing so has made their models watered down at best, and laughable at worst. For the purposes of economic theory, I would say she didn't act rationally, and that redefining the term 'rational' so that it fits her actions neuters it for all other purposes. Whatever pleasure she gains from the egg is immeasurable, so calling it rational just creates a clusterfuck because any action can be redefined as rational in those terms.
You must accept some extent of rational utility preferences to answer any of these econ theory questions. So I think using rational = max utility is somewhat acceptable for the purposes of posing a strictly theoretical question.
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EPT
