1 In behavioral economics what is meant by the framing effec

1.     In behavioral economics, what is meant by the “framing effect”?

(b) In the standard economic model of consumer behavior, as a person consumes more of a product, do we assume that his marginal utility is increasing or diminishing?

(c) In behavioral economics, what is meant by the “endowment effect”?

Solution

A) Behavioural economics is a part of economics which studies the economic decisions of the individual on the basis of various psychological factors and the decisions of an individual on different economic situations.

When the choice of an individual can be influenced by the way the subject is presented, it is called as framing effect. For an instance, while a bus accident news channels showed that 16 people are rescued from the accident spot and taken to the hospital immediately and are safe creating a positive framing of news. Whereas another channel shows the same news as 16 people out of 32 died on the spot and could not be rescued yet, giving a negative aspect of the same situation. The behaviour of the viewer will depend upon how the news is presented and what aspects of the situation are presented to the viewer.

B) As per the standard economic model of consumer behaviour, the marginal propensity to consume one more unit declines with the continuous consumption of units. In other words, the first unit consumed gives the highest utility to the consumer which declines with every next unit consumed. Thus the marginal utility declines as the person consume more of a product.

C) endowment effect is a situation when a person tends to value the things he owns, more than what they actually they are worthy of, and values less the things he has not owned yet.

For example, suppose you own an apartment which is your ancestorial property and you want to sell it. The worth of the apartment according to you is at least $10 million but actually the market price of the apartment is only $8 million. Now a same kind of apartment you want to buy is valued by you at $7 million which is $1 million lower than the actual price of it. It is a part of human behaviour and this is how the endowment effect works.