194 PART • Producers, Consumers, and Competitive Markets not get a wage that they feel is fair may not put much effort into their work.29 (In Section 17.6, we will see that paying workers higher-than-market wages can also be explained by the “efficiency wage theory” of labor markets, in which fairness concerns not apply.) Fairness also affects the ways in which firms set prices and can explain why firms can more easily raise prices in response to higher costs than to increases in demand.30 Fortunately, fairness concerns can be taken into account in the basic model of consumer behavior If individuals moving to San Francisco believe that high apartment rents are unfair, their maximum willingness to pay for rental housing will be reduced If a sufficient number of individuals feel this way, the resulting reduction in demand will lead to lower rental prices Similarly, if enough workers not feel that their wages are fair, there will be a reduction in the supply of labor, and wage rates will increase Rules of Thumb and Biases in Decision Making Many economic (and everyday) decisions can be quite complex, especially if they involve choices about matters in which we have little experience In such cases, people often resort to rule of thumb or other mental shortcuts to help them make decisions In the tipping example, you took a mental shortcut when you decided to offer a 15-percent tip The use of such rules of thumb, however, can introduce a bias into our economic decision making—something that our basic model does not allow.31 • anchoring Tendency to rely heavily on one prior (suggested) piece of information when making a decision ANCHORING The mental rules that we use in making decisions frequently depend on both the context in which the decisions are made and the information available For example, imagine that you just received a solicitation from a new local charity to make a donation Rather than asking for a gift of any amount, the charity asks you to choose: $20, $50, $100, $250, or “other.” The purpose of these suggestions is to induce you to anchor your final donation Anchoring refers to the impact that a suggested (perhaps unrelated) piece of information may have on your final decision Rather than trying to decide precisely how much to donate—say $44.52—and not wanting to appear miserly, one might simply write a check for the next higher category—$50 Another individual wishing to make only a token donation of $10 might choose the lowest stated amount, $20 In both cases, anchoring can bias individual choices toward larger donations Similarly, it’s no coincidence so many price tags end with the digits 95 or 99 Marketers understand that consumers tend to overemphasize the first digit of prices, and also to think in terms of price categories like “under $20” or “over $20.” Thus to the consumer, who may not be thinking too carefully, $19.95 seems much cheaper than $20.01 RULES OF THUMB A common way to economize on the effort involved in making decisions is to ignore seemingly unimportant pieces of information 29 For a general discussion of behavioral economics and the theory of wages and employment, see George Akerlof, “Behavioral Macroeconomics and Macroeconomic Behavior,” American Economic Review 92 (June 2002): 411–33 30 See, for example, Julio J Rotemberg, “Fair Pricing,” NBER Working Paper No W10915, 2004 31 For an introduction to this topic see Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,” Science 185 (September 1974): 1124–31