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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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16984 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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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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United States22883 Posts
On April 16 2009 06:27 Savio wrote:Show nested quote +On April 16 2009 06:01 Jibba wrote: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).
This is why I'm talking about presidential voting. If you want to use rational choice to prove why people vote in presidential elections, the formula would be something like this:
P(U1 - U2) + C > 0
P is the probability of your vote's importance, which is measured by its ability to break a tie, but with an electoral college there is 0% chance of that happening. For local->Senate (and this is only a modern development, not how the framers intended), yes, but not in a presidential election. So as an individual, if you don't vote, it has no bearing.
U1/U2 are obviously the two sides of the vote (which always comes down to two sides as I briefly mentioned in the other thread), so Republicans and Democrats.
C is the cost of voting. For many people, it's extremely little, but for others there's constraints like time and transportation, and in our system you have the right not to vote (which is not true in a lot of European countries, which is largely why our turnouts seem "bad"; there's no coercion.)
Now, you could add in other variables like Duty or Millsian self-interest (the fear of what would ensue if no citizen voted), but these cannot be quantified.
In: P(U1 - U2) + C + D + SI > 0
D and SI are qualitative variables, So you can SAY that everyone is rational (which I'm alright with), when you factor in things like preferences/culture/etc., and you can still make general inferences off of your findings, but any attempts to quantitatively model it are inherently flawed, which is a huge kick in the nuts to rational choice economists and political scientists everywhere.
In case you're wondering, this is what I'm working off of here. Downs goes with the second version of that model, and I think it's bogus.
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On April 17 2009 08:45 Jibba wrote:Show nested quote +On April 16 2009 06:27 Savio wrote:On April 16 2009 06:01 Jibba wrote: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). This is why I'm talking about presidential voting. If you want to use rational choice to prove why people vote in presidential elections, the formula would be something like this: P(U1 - U2) + C > 0 P is the probability of your vote's importance, which is measured by its ability to break a tie, but with an electoral college there is 0% chance of that happening. For local->Senate (and this is only a modern development, not how the framers intended), yes, but not in a presidential election. So as an individual, if you don't vote, it has no bearing. U1/U2 are obviously the two sides of the vote (which always comes down to two sides as I briefly mentioned in the other thread), so Republicans and Democrats. C is the cost of voting. For many people, it's extremely little, but for others there's constraints like time and transportation, and in our system you have the right not to vote (which is not true in a lot of European countries, which is largely why our turnouts seem "bad"; there's no coercion.) Now, you could add in other variables like Duty or Millsian self-interest (the fear of what would ensue if no citizen voted), but these cannot be quantified. In: P(U1 - U2) + C + D + SI > 0 D and SI are qualitative variables, So you can SAY that everyone is rational (which I'm alright with), when you factor in things like preferences/culture/etc., and you can still make general inferences off of your findings, but any attempts to quantitatively model it are inherently flawed, which is a huge kick in the nuts to rational choice economists and political scientists everywhere. In case you're wondering, this is what I'm working off of here. Downs goes with the second version of that model, and I think it's bogus.
That wikipedia article is interesting. It sort of backs up what I said to Choros about how 2 very similar politica parties as we have now does not represent the failing of our political system, but rather is proof that it is working properly.
I bet that is an interesting book. His point about dual peaked political spectrum leading to extremism made me think about how hard it is to get the Iraqi politicians to compromise with eachother and it provides an explanation that I can understand. I think I understand that a lot better now from only reading the article.
Also, if I may make some alterations to your voter equations:
The way you have explained it, a voter would vote if Q is positive in this equation:
Q=P(U1,U2)B - C.
Where Q represents your costs benefit analysis of voting, P is the probability of your voting making a difference (which is a function of the political struggle U1 and U2 but not simply U1-U2), and B is the benefit the voter would recieve if his candidate won (you left that out). Obviously someone who genuinely doesn't care who wins will have a small B while an activist would have a large value for B. C like you said is the cost of voting.
So that is the model you are talking about. Now I say that it HAS to include at least 1 other variable that we can call all the "intangible" benefits of voting such as sense of duty, sense of purpose, sense of team, whatever.
So it should be Q=P(U1, U2)B - C + N
Where N is the intangible benefits of voting. This N, for example would tend to be smaller for young people (this is why young people don't vote very often), and large for old people (the most reliable voting block in the US). So you can see that even if P = 0, if N is greater than C, then the person will still vote. For young people often C>N so they don't vote and for most old people, N>C so they do vote.
This year, there was sort of a frenzy for Obama at university campuses. I saw at my school that everyone was asking, "Have you voted for Obama yet?" taking it for granted that we would all vote for him. But there was still a bit more pressure on young people so their N went up a little bit and a few more of them voted.
You can't leave N out, because it IS the important factor. P is virtually 0 for everyone, but N and C really determine whether people will vote. (this is also why parties rent buses to move people because that lowers peoples C to hopefully below their N).
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United States22883 Posts
I like your revisions, but it still leads me to ask how you can you do quantitative research with it? I can see how rational choice works if you qualitatively analyze it (like you would when looking at N), but the common move when using rational choice is to put it into some type of nomothetic formula, such as game theory. If everyone has different characteristics that determine rationality (N), but you can't measure N, how can you find what a rational actor would do?
A series of preference questions maybe? Directly attaching numbers is a mistake, but you could use comparisons to find out people's highest priorities in relation to one another? Then again, that also assumes people know what their priorities are.
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Median voter theorem and the Condorcet process perhaps? When it comes down to two choices the only vote which matters is the preference of the median voter. In that sense no one else could bother voting since it's only the median voter who determines the outcome or everyone else could vote and not have any effect. If everyone is rational then everyone knows this.
The economics of democracy isn't something I'm familiar with at all.
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EPT
