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CHAPTER • Uncertainty and Consumer Behavior 193 P F IGURE 5.12 $40 DEMAND FOR SNOW SHOVELS $25 $20 D2 D1 Q1 Q2 Demand curve D1 applies during normal weather Stores have been charging $20 and sell Q1 shovels per month When a snowstorm hits, the demand curve shifts to the right Had the price remained $20, the quantity demanded would have increased to Q2 But the new demand curve (D2) does not extend up as far as the old one Consumers view an increase in price to, say, $25 as fair, but an increase much above that as unfair gouging The new demand curve is very elastic at prices above $25, and no shovels can be sold at a price much above $30 Q the price has always been $20, and they feel that a sharp increase in price after a snowstorm is unfair gouging and refuse to buy Note also how we can modify standard demand curves to account for consumer attitudes towards fairness Another example of fairness arises in the ultimatum game Imagine that, under the following rules, you are offered a chance to divide 100 one-dollar bills with a stranger whom you will never meet again: You first propose a division of the money between you and the stranger The stranger will respond by either accepting or rejecting your proposal If he accepts, you each get the share that you proposed If he rejects, you both get nothing What should you do? Because more money means more utility, our basic theory provides a clear answer to this question You should propose that you get $99 while the other person gets only $1 Moreover, the responder should be happy to accept this proposal, because $1 is more than he had before and more than he would get if he rejected your offer (in both cases zero) This is a beneficial deal for both of you Yet most people facing this choice hesitate to make such an offer because they think it unfair, and many “strangers” would reject the offer Why? The stranger might believe that because you both received the windfall opportunity to divide $100, a simple and fair division would be 50/50 or something close to that Maybe the stranger will turn down the $1 offer to teach you that greediness is not appropriate behavior Indeed, if you believe that the stranger will feel this way, it will be rational for you to offer a greater amount In fact, when this game is played experimentally, typical sharing proposals range between 67/33 and 50/50, and such offers are normally accepted The ultimatum game shows how fairness can affect economic decisions Not surprisingly, fairness concerns can also affect negotiations between firms and their workers A firm may offer a higher wage to employees because the managers believe that workers deserve a comfortable standard of living or because they want to foster a pleasant working environment Moreover, workers who
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