Economic agents (for example, consumers or firms) often do things that at first glance seem to be inconsistent with their self-interest
People tip at restaurants and when they are on vacation even if they have no intention to return to the same place. Firms, sometimes, install costly pollution abatement equipment voluntarily. How can these deviations from Nash predictions be explained?
There are several possible explanations. Firms might voluntarily install pollution abatement equipment if they believe consumers will eventually learn about the firm's polluting behavior and stop buying its products. In some cases, the payoffs may be more complex than just monetary payoffs. For example, people may care about the net benefits that someone else receives. If this is the case, then behavior may reflect social preferences, meaning that the individual's benefits are defined not only by his own payoffs, but also by the payoffs of others. In other examples the implications of a repeated relationship are very different from a game that is played just once.
You might also like to view...
When the cross-price elasticity of demand for two goods is a positive number, one can correctly conclude that:
a. the goods are normal goods. b. the goods are inferior goods. c. the goods are substitutes. d. the goods are complements. e. total revenue will increase when the price increases.
Because incomes are limited, purchasing one thing means not being able to purchase other things. This indicates that:
a. marginal utility diminishes. b. marginal utility is constant. c. people will allocate their income among goods so as to achieve the most satisfaction. d. people will allocate their income among goods so that the marginal utilities of all goods is equal. e. people will allocate their income among goods so that the marginal utilities of all goods is zero.