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I think both these questions are really stupid....
1st + Show Spoiler +Either no one ever pays, or the man "paid" by creating this wonderful cheque that was accepted as payment.
The question does not reveal which way of thinking will be marked correctly or incorrectly. It cannot be answered because the other answer is equally as acceptable if you think about them individually.
2nd + Show Spoiler +Almost exact same problem, either 5 for 1 vs 2 for 2 is complete failure, in unitary terms, or it's complete success in terms of not having to go through something unpleasant. It's all about how you are valuing the money and the personal experience.
For these reasons, and the fact that the OP has no "official answers" but only his opinions, means IMO that this thread is a massive waste of time.
Also both sides to both questions were given before he stated "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'm hoping the "correct" solutions according to the OP aren't going to be page long mathematical solutions like half the stuff in the riddles thread.
You said High School knowledge of economics Milton -.-
2 revised + Show Spoiler +I'm going to take a stab in the dark that economically, she should have purchased 2 for 2, because although she has to go through twice the pain if the eggs are bad, it cost her less than half.
I guess since I just came up with third answer(sorry if someone else did it and I didn't understand I'm not re-reading all the responses in here YET again) then in all likelihood my complaints here are BS, regardless I still stick by them until I am proven horribly wrong. Then I shall repent. Only if.
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1 : the man paid for his stay in the hotel. the money used for the check is a sunk cost; he can't use it (well he could, but then he would incur fees from his bank  )
2 : irrational. a huge underlying assumption of economics is that more = better given that it's a normal good. for her to maximize utility by taking less of a good for more money would imply intersecting utility curves, which doesn't work
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After mulling it over, I think:
1 - The person with the cheque is paying, every person that is accepting the cheque is losing $100 equivalent except for the original man until it's cashed in
2 - Well it doesn't say both eggs have to be eaten right now. Just that both have to be eaten, so buying 2 for 2p I think is much better, so irrational
You'd better gives us the proper answers later!
Man why do what I learn in economics seem nothing like this
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1 + Show Spoiler +The man creates value, only backed by trust. It's like how banks create money. We all know how that goes  . This created value from the man then pays for the hotel. So extra value is created in the world. That extra value will only be compensated when someone cashes that check.
2 + Show Spoiler +
Depends too much on definitions. I wouldnt want to eat two bad eggs. But when you see a bad egg you know it's bad and you won't eat it anyway. (bad as in rotten). Also if i get nauxious when I eat too much egg, I obviously wont eat more than 1 egg.
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Roffles
Pitcairn19291 Posts
I haven't looked at the question, but I find the OP's name to be quite exhilarating and interestingly correlated with the topic.
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I agree with Durak on 2.
She is increasing the cost and get no extra utility for the extra cost.
and increasing her risk. You might think of the eggs like a portfolio, spreading the risiko for bad eggs. Because if that one egg is bad she looses all. If one of the two eggs is bad she looses half.
From an economic point of view.
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for number 2, the marginal cost of the 2nd egg is -3, so if the marginal benefit for alice is greater than or equal or to -3 (ie, it causes her less than or equal to 3 units of "pain she should consume this egg.
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United States22883 Posts
On April 16 2009 02:08 CommanderFluffy wrote:Show nested quote +On April 16 2009 02:00 Jibba wrote: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.
What are you calling utility? In this case, I would say tangible material benefit. What people are saying is that emotional satisfaction makes it a rational choice, and I'm saying emotional satisfaction can't factor into rational choice, unless you want it to be useless.
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On April 16 2009 03:31 axion wrote:
I agree with Durak on 2.
She is increasing the cost and get no extra utility for the extra cost.
and increasing her risk. You might think of the eggs like a portfolio, spreading the risiko for bad eggs. Because if that one egg is bad she looses all. If one of the two eggs is bad she looses half.
From an economic point of view.
I actually changed my opinion after Lemonwalrus' argument and re-reading the question. I didn't notice that she had to eat the second egg, which is pretty key.
It don't think it matters if the first egg is good or not. Alice has decided to purchase it because she thinks it is worth at least 5p regardless. What matters is the second egg. If the marginal benefit she gains from purchasing two eggs (save 3p) is greater than what she values the marginal cost to be (the egg could be bad, it could make her too full, whatever) then she should purchase it. Since she bought one egg, we can assume that the marginal cost was greater than the marginal benefit.
Those are my thoughts anyway. As the OP said, the questions are up to interpretation and there really isn't any right answer. It depends what theories you believe.
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This is the answer:
+ Show Spoiler +
1. The guys paid for his own stay. Money is just a "medium of exchange" whether it be paper, rocks or whatever. Anything that someone accepts as payment has been used as a medium of exchange and is money.
2. Her choice was rational only if you assume a few things
First that she is risk averse (this is necessary for the uncertainty analysis) and secondly that she HAS to consume both if she buys both and cannot throw one away. Utility can go negative with overconsumption.
If she can throw one away if she wants, then she would be irrational under the principle of monotonic preferences
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United States22883 Posts
Here's a question for you: Is voting for President in the United States a rational act?
Strictly speaking in a cost/benefit analysis, ignoring any sense of 'duty.' Maybe if you live in Palm Beach County, FL, but what about if you live in Utah or NY?
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On April 16 2009 05:38 Jibba wrote:
Here's a question for you: Is voting for President in the United States a rational act?
Strictly speaking in a cost/benefit analysis, ignoring any sense of 'duty.' Maybe if you live in Palm Beach County, FL, but what about if you live in Utah or NY?
Yes. You can't just assign the possible effect your vote might have as the only benefit. People make choices that make them happy or feel good and so you can't ignore "duty" or any other sense that might encourage them to vote.
Just like giving to charity is also rational.
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United States22883 Posts
On April 16 2009 05:45 Savio wrote:Show nested quote +On April 16 2009 05:38 Jibba wrote:
Here's a question for you: Is voting for President in the United States a rational act?
Strictly speaking in a cost/benefit analysis, ignoring any sense of 'duty.' Maybe if you live in Palm Beach County, FL, but what about if you live in Utah or NY? Yes. You can't just assign the possible effect your vote might have as the only benefit. People make choices that make them happy or feel good and so you can't ignore "duty" or any other sense that might encourage them to vote. Just like giving to charity is also rational.
If you count what makes people feel good, then how do you apply rational choice theories to actual predictions/models? This is what econometric modeling is based around - that people make rational cost/benefit analyzes. Since there's no way to measure "goodness," how do you make the model?
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When I said I have no official answers it meant I can't say my answers are 100% correct, not that there is no right answer. These are both past exam questions (apparently) so I presume a mark scheme exists. That said, I'll give my response to question 1 now because it's fairly short.
I like LemonWalrus' answer and nK)Duke even made the distinction that the man had created money and not a good. And it's money which has been created! The man who stayed in the hotel has written this check that is now being circulated through the economy and treated as if it were a $100 bill. If the check is as good as a $100 bill without being cashed then he has created $100 in the economy. By increasing the money supply, while income and output is unchanged, the price level in the economy must rise. Hence, everyone's real income lowers and the answer is everyone pays for his hotel stay via the inflation tax.
A professor I had asked this in class years ago, and a shortened version of the above was how I answered then. He agreed with me so I like to think I'm right, but I'm open to discussion and why I might be wrong.
Second answer is longer so I'll type it up soon.
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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?
+ Show Spoiler + In all technicality, no one paid for it. The check hasn't been cashed yet, so the bank hasn't taken it out of his account. I think this question just tries to draw out your understanding of present-future terms of money as well as how it flows in the economy. There are so many technicalities involved and what-ifs involved, you can reach so many conclusions. Like what if there is a time limit on the check, and no one cashes it by then. Edit: After thinking about what I recently learned in business law, this probably has a lot to do with the technical definitions of monetary substitutions and contracts (i.e. promise to pay vs intention to pay, acceptance vs offering, etc.). Unfortunately, I already sold my book, so I can't look at them anymore 
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.
+ Show Spoiler +Economically speaking, yes, this is rational. We do it all the time. How many computers could you have bought with the actual price you paid for the computer you are sitting at right now, if you would have bought it in bulk? The $1.50 grocery stand charges you per apple is probably what the grocery store paid for a dozen apples. Also, it's no coincidence that it follows the principles of supply and demand.
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On April 16 2009 06:01 Jibba wrote:Show nested quote +On April 16 2009 05:45 Savio wrote:On April 16 2009 05:38 Jibba wrote:
Here's a question for you: Is voting for President in the United States a rational act?
Strictly speaking in a cost/benefit analysis, ignoring any sense of 'duty.' Maybe if you live in Palm Beach County, FL, but what about if you live in Utah or NY? Yes. You can't just assign the possible effect your vote might have as the only benefit. People make choices that make them happy or feel good and so you can't ignore "duty" or any other sense that might encourage them to vote. Just like giving to charity is also rational. If you count what makes people feel good, then how do you apply rational choice theories to actual predictions/models? This is what econometric modeling is based around - that people make rational cost/benefit analyzes. Since there's no way to measure "goodness," how do you make the model?
It depends on what your modeling. Each model will have different measure. If you are modeling behavior like spousal abuse, you will use different measures than if you are modeling a company's production choice.
Generally speaking, the easy models to make are when you are modeling the decisions of a company in a market because they tend to be driven by simple things that you can measure (namely short term profits). This is why most economic models may use money...because they are modeling a relatively simple thing (a company) and not a very complicated thing (an individual person).
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1. The man...
2.
It doesnt say anything about the risk of bad taste/poison or the chance of a good Burger.
If it's 50/50 then it's rational, 5/95 then it's not rational.
To me it's impossible to give a "correct" answer without more facts.
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I see some discussion about rationality and utility @_@ I define utility maximization as the theoretical construct, that takes utility to be happiness and is measured by income and goods consumed. This theoretical utility function exists because we can observe prices, demands and incomes.
Anyway, my take on the second question:
Using very basic preference theory, if the eggs are assumed to be bad then she needs more money to compensate her for consuming more. It's possible that there is some utility function making her indifferent between the two choices. But Alice doesn't know whether they are bad or not, implying she has to make a choice under uncertainty. Savio is correct that Alice is needed to be risk averse (I got the impression this is implied in the text), but I think you can say slightly more.
For convenience, assume consuming eggs give a payoff measured in wealth, W. The two choices presented can be seen as gambles. Alice starts with initial wealth W(0), and either the egg can taste great in which case she gets W(0) + x or it nearly kills her and her post gamble wealth is W(0) - x. The utility of the expected payoff is U[W(0) + x'], -x < x' < x, whereas the expected utility from gambling is EU[W(0) + x'] and by definition of risk aversion must be less than the utility of expected payoff. The same argument can be applied to the second gamble she faces, which is consuming 2 eggs, however, due to concavity the utility of the expected payoff is the same while the expected utility is much lower. There is some value that can compensate Alice for taking either gamble, call it y in the case of eating 1 egg and y* in the 2 egg case. So that U[W(0) + x'] = EU[W(0) + y + x']. The compensation must be greater in the second case, so y* > y. The text says the compensation offered to take the 2 egg gamble is 3 pence, which Alice turns down. Therefore, Alice is rational only if the compensation she requires to take the 2 egg gamble is greater than 3 pence.
My fault, I did say high school level but that was only the preference theory part, the uncertainty part was more complicated to write out than I first thought. And I could still be wrong.
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On April 16 2009 08:00 Milton Friedman wrote:
I see some discussion about rationality and utility @_@ I define utility maximization as the theoretical construct, that takes utility to be happiness and is measured by income and goods consumed. This theoretical utility function exists because we can observe prices, demands and incomes.
Anyway, my take on the second question:
Using very basic preference theory, if the eggs are assumed to be bad then she needs more money to compensate her for consuming more. It's possible that there is some utility function making her indifferent between the two choices. But Alice doesn't know whether they are bad or not, implying she has to make a choice under uncertainty. Savio is correct that Alice is needed to be risk averse (I got the impression this is implied in the text), but I think you can say slightly more.
For convenience, assume consuming eggs give a payoff measured in wealth, W. The two choices presented can be seen as gambles. Alice starts with initial wealth W(0), and either the egg can taste great in which case she gets W(0) + x or it nearly kills her and her post gamble wealth is W(0) - x. The utility of the expected payoff is U[W(0) + x'], -x < x' < x, whereas the expected utility from gambling is EU[W(0) + x'] and by definition of risk aversion must be less than the utility of expected payoff. The same argument can be applied to the second gamble she faces, which is consuming 2 eggs, however, due to concavity the utility of the expected payoff is the same while the expected utility is much lower. There is some value that can compensate Alice for taking either gamble, call it y in the case of eating 1 egg and y* in the 2 egg case. So that U[W(0) + x'] = EU[W(0) + y + x']. The compensation must be greater in the second case, so y* > y. The text says the compensation offered to take the 2 egg gamble is 3 pence, which Alice turns down. Therefore, Alice is rational only if the compensation she requires to take the 2 egg gamble is greater than 3 pence.
My fault, I did say high school level but that was only the preference theory part, the uncertainty part was more complicated to write out than I first thought. And I could still be wrong.
Somebody is taking intermediate price theory 2 (or whatever you call it at your uni).
I was a TA for that class and for the one before it 
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EPT
