Final answer:
The statement regarding expected utility theory not accounting for discounting is incorrect, as utility functions can include a discount factor for future rewards. Additionally, buyers in the goods market may pay above equilibrium price due to factors like perceived value or urgency of need.
Step-by-step explanation:
Understanding Expected Utility Theory and Discounting
The statement “Expected utility theory cannot account for discounting” is false. Expected utility theory is indeed capable of incorporating discounting through the mechanism of the utility function. The utility function represents how an individual values different outcomes by assigning a utility value to various possible outcomes depending on their preferences.
Discounting, on the other hand, refers to the process whereby future benefits are perceived as less valuable than immediate benefits; hence people are willing to accept a smaller reward now rather than a larger one later. To capture this behavior within expected utility theory, we apply a discount factor to future utilities.
For instance, when calculating the expected utility of a reward that will be received in the future, one would discount that future utility by a certain factor which reflects their time preference. This factor typically is a number less than one, diminishing the utility of future rewards in the present consideration.
It is also worth discussing the statement “In the goods market, no buyer would be willing to pay more than the equilibrium price.” This statement is also false, as there can be several reasons a buyer might be willing to pay more than the equilibrium price. Factors such as perceived value, urgency of need, brand loyalty, or product scarcity can all drive a buyer to pay a premium over the equilibrium price. Thus, while equilibrium price will generally attract the most buyers, it is not a strict upper limit on what buyers are willing to pay.