(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 218

CHAPTER 5 • 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 do