Question

One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a local market. But he is unwilling to drive 20 minutes out of his way to save $10 on a laptop that costs $400 at a local store.A. In percentage terms, how big is the savings on the grocery item?On the laptop?B. In absolute terms, how big is the savings on the grocery item?On the laptop?C. If Samir is willing to sacrifice 20 minutes of his time to save $4 in one case, shouldn't he also be willing to sacrifice 20 minutes of his time to save $10?

Answer 1

Samir's willingness to drive out of his way to save money on different items illustrates how people value percentage savings over absolute dollar amounts, which is explained by behavioral economics. Specifically, a 40% savings on a grocery item may seem more appealing than a 2.5% savings on a laptop, despite the latter offering a higher absolute dollar savings.

Step-by-step explanation:

Samir's situation is a classic example of how people perceive savings in percentage terms rather than absolute dollar amounts, which is a concept analyzed within behavioral economics.

A. Savings in percentage terms:

For the grocery item at $10, saving $4 represents a 40% discount (calculated as $4 savings / $10 original price * 100). For the laptop at $400, a $10 saving represents a 2.5% discount (calculated as $10 savings / $400 original price * 100).

B. Savings in absolute terms:

In absolute terms, the savings are simply the dollar amounts saved, which are $4 on the grocery item and $10 on the laptop.

C. Comparison of savings:

Although Samir is more inclined to save $4 on a grocery item than $10 on a laptop, this may seem irrational from a mainstream economic perspective where "$10 is $10". However, from a behavioral economics standpoint, Samir's decision-making can be influenced by the relative perceived benefit, framing the decision based on the initial cost of the items.

Answer 2

A. Grocery= 40%, Laptop= 5%

B. Grocery= $4, Laptop= $10

C. Yes

Explanation:

A. The percentage savings for grocery

= $4/$10 x 100 = 40%

The percentage savings for laptop

=$20/$400 x 100 = 5%

C. Considering the value of the saving, Samir should be more willing to sacrifice 20 minutes of his time to save to save $10 because a $20 dollar savings has higher economic value.