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wednesday5econlive · 2 years

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Robert's Presentation on Rationality of Preferences: The Play

Derek Wu

65127642

[email protected]

Characters:

Robert - A college student who attends the basic economics course/presenter of the rationality of preferences

Nathan - Robert's classmate #1

Natalie - Robert's classmate #2

Professor Baldwin - The professor of basic economics course

It's the day of the final presentation for the basic college economics course. Robert, one of the students, will present the rationality of preferences as his topic.

Nathan:

That concludes my presentation on the production possibilities frontier. Thank you for listening!

(Applauses reverberate the entire lecture hall)

Professor Baldwin:

Very well done Nathan! (applauding)

Professor Baldwin (CONT'D)

(looking through his notes) Ok, the next presenter will be—Robert. Please come up to the podium.

Robert:

Ok.

(After Robert pulls out his slides from the class file…)

Robert:

May I begin?

Professor Baldwin:

Go ahead. The floor is all yours.

Robert:

Ok, so—good morning fellow classmates and professor. This is Robert and today the topic of my presentation is the rationality of preferences. (Goes to the next slide with an image of a grocery shopper picking out items)

As grocery shoppers, we purchase the same items that we already decide to purchase every time we go to a grocery store. Moreover, we purchase the same amount of groceries to fulfill our needs consistently. For example, I love Caprisun so I always buy 4 packs of Caprisun because it’s the ample amount without overspending, considering that I have other groceries to buy. However, there are times when I reduce or increase my Caprisun consumption due to factors like change in my part time job income or product price.

This presentation will focus exactly on a real life example of how an individual chooses the items rationally when dealing with change in job income or product price, as well as additional factors. (Goes to the next slide that displays this figure)

Robert:

Before I get into the main idea, I need to talk about economic rationality, which needs to be fulfilled under these two conditions. The first one is completeness, meaning the individual needs to express a preference and reason against other alternative options. The second one is transitivity, meaning the sequence of each successive preference needs to be consistent without any overlap. For example, if x is mostly preferred to y and y is mostly preferred to z, then x is mostly preferred to z.

(Goes to the next slide that displays this figure)

This is my roommate Joseph's income, prices of each item he usually buys, and how much he consumes each item, throughout the three weeks. For convenience, we will only focus on three items, which are apples, tomatoes, and onions. Pa and qa represent the price and quantity of apples, pt and qt represent tomatoes, and po and qo represent onions. I've organized these data into a table, which will be the main focus of my presentation. (Goes to the next slide that displays this figure)

This is the table I've created. The three sets of numbers in the top row represent the prices of Joseph's items, while each number in each set represents each item's price, from apples to tomatoes and onions, respectively. The other three sets in the left column represent each item's quantity. The numbers in the bottom row represent Joseph's income. Each remaining number represents the total amount required to spend on the items. Just multiply each quantity by each price and add them all together to get the total.

Let's focus on the week 1 column on the left first. Since Joseph's week 1 income is $42, he can only pick the top basket and the bottom basket. Because the middle basket costs $57, which is infeasible, since he only has $42. However, for some reason, Joseph picks basket 1 over basket 3, even though basket 3 is also affordable. So let's make a notation for Joseph’s final choice for week 1. May I use the whiteboard professor?

Professor Baldwin:

Go ahead, if it helps with your presentation.

Robert:

Thanks.

(Robert takes a black marker writes down the notation Basket 1 ≥ Basket 3)

Robert:

This notation means basket 1 is mostly preferred to basket 3. Now let's move on to the week 2 column in the middle. Basket 1 and 2 are within Joseph's week 2 budget, which is both $22.4. Yet, Joseph picks basket 2 over basket 1, so he mostly prefers basket 2 over basket 1. (writes down Basket 2 ≥ Basket 1)

Lastly, let's focus on the week 3 column on the right. We anticipate Joseph choosing basket 2 because of the transitivity rule, also because basket 2 is also affordable, but he ends up choosing basket 3. (writes down Basket 3 ≥ Basket 2)

If we combine these three notations, we get this. (writes down Basket 2 ≥ Basket 1 ≥ Basket 3 ≥ Basket 2). We can see that Joseph's preferences aren't rational because they violate the transitivity rule, as basket 2 cannot be preferred over basket 2.

So how about we imagine an alternative situation? (Goes to the next slide with the alternative week 3 data)

Week 3. Joseph's income = $35.2. Prices = (pa = 0.4, pt = 1.5, po = 4.2). Joseph's consumption bundle: (pa = 10, pt = 4, po = 6).

If we switch Joseph's week 3 income from $30.8 to $35.2 and the price of tomatoes from $0.4 to $1.5, how will this impact the rationality of Joseph's preferences now? Please look at this second table I've created. (Goes to the next slide with the second table)

According to the table, now basket 1 and basket 2 are both unaffordable due to the rise in tomato price and total basket prices being higher than Joseph's week 3 income. As a result, Joseph has no choice but to go with basket 3 because he can afford the total price for basket 3. Moreover, his choice doesn’t violate transitivity because ultimately he prefers basket 3 over basket 2, instead of basket 2 over basket 2. (Moves on to the next slide with the question: What is the fundamental factor that affects Joseph choosing a suitable consumer basket?)

Now, I have a question for everyone. Throughout the discussion of Joseph's choices for his consumer baskets, what is the fundamental factor that affects him making his decision? Anyone who would like to answer this question? (Robert raises his hand as a gesture to ask anyone to speak)

(Natalie (classmate #2) raises her hand)

Robert:

Yes Natalie?

Natalie:

Is it affordability?

Robert:

That's absolutely correct. In fact, your answer is the exact word I'm expecting, which is affordability. (Clicks on the keyboard and the word "affordability" appears below the question)

Most of you might think the factor is either the price of the products or Joseph's income or both. Those are also indeed important factors, but regardless of the price or Joseph's income, the ultimate question Joseph needs to be asking himself is, "Can I afford these products or not?" So to demonstrate this answer, I wanna go back to the second table we went through earlier. (Returns to the previous slide with the second table)

Let's imagine this scenario. Joseph is a huge fan of tomatoes. In the week 2 column, even though he can afford both the first and second consumer basket, he wants to choose the second basket because there are more tomatoes than the first basket. Unfortunately, in week 3, due to the rise in tomato prices, he can't afford the second and first basket, so he has no choice but to pick the third basket because he can at least afford it with his income, despite it having the least number of tomatoes. This kind of phenomenon is called the "weak axiom of revealed preference". (Goes to the next next slide with the term "weak axiom of revealed preference")

In the field of economics, we suppose people's preferences are always rational. Using Joseph's alternative scenario as an example, we assume he always purchases a large bundle of tomatoes because he loves tomatoes. However, if we take the weak axiom of revealed preferences into account, we also consider that Joseph may not always buy a lot of tomatoes due to his inability to afford them or an increase in product price. The weak axiom of revealed preferences allows us to debunk the misconception that rationality always takes part in people’s preferences. (Goes on to the next slide with the term "independence of irrelevant alternatives" and "random utility")

Apart from affordability being an integral factor in making decisions to buy groceries, there are other two important factors that we may overlook. The first factor is what economists call "independence of irrelevant alternatives". For example, while apples, tomatoes, and onions are the only items on Joseph's shopping list, one day he comes across a bucket of ice cream, then he decides to replace one of the three items with ice cream because not only he's been craving for ice cream recently, but also including the ice cream in his shopping list might make him go over budget. Simply put, Joseph chooses an alternative product irrelevant to his shopping list, which can be unpredictable when talking about rationality.

The second factor is known as "random utility". For example, Joseph loves tomatoes but one day he suddenly wants to buy more apples and onions for no reason. This situation is also unpredictable because consumers may deviate from their rational preferences without any reason. (Goes on the next slide with the word "conclusion")

My purpose for presenting you Joseph's choices of shopping for groceries and explaining his sensibility is that it applies to any of you who aspires to become successful entrepreneurs. If you want people to like your products, you need to learn how to utilize people's rationality to predict whether your products will fulfill the public's needs. If it doesn't, what are the reasons people dislike your products? Is it because people cannot afford the products? Do the products stand out less compared to similar products with different brands? Don't create products based on your own interest because even if you personally like them, it doesn't mean the public will like them. I hope this presentation will not only inform you about the rationality of preferences, but also it will teach you the importance of considering people's preferences when starting your business. Thank you everyone and I will now end my presentation.

(Applauses once again reverberate the whole lecture hall, but louder)

Professor Baldwin:

Absolutely wonderful Robert! Students, please remember Robert's advice at the end of his presentation if you want to become a businessman. His advice is also the reason I include this specific lesson about the rationality of preferences in my course. Thank you Robert and you may return to your seat.

(After Robert returns to his seat, he lets out a big sigh)

Robert:

Whew! (whispering to himself) It's finally over. I managed to retain my composure even though I was so nervous during practice. Good thing my hard work has paid off.

Nathan:

(gently taps Robert's shoulders) Good job Robert. I really enjoy your presentation. Not gonna lie, it's more effective than reading the textbook and listening to prof's lectures. Also, I like your commentary at the end.

Robert:

Wow, I feel flattered. I really do. Thanks a lot Nathan!

While waiting for the next presentation to start, Robert slouches against his seat and recalls all the hard work he has done, Professor Baldwin's comments, and Nathan's compliments. Although the score won't be released until the week after next, a relieved smile emerges from his face.

(End)

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