Can you solve this economics problem using the Rational Consumer theory?

neither store allows returns

The fatal flaw in classical economics is the assumption that people are "rational". How many rational people do you know?

Could be any number of things- consumer preferences, return policy (and some information asymmetry about the policy) of the store, etc.

The fatal flaw in economics is not rational consumers- it is the lack of understanding of what the rational consumer assumption is. A simple way to explain it is that there's only one way to make the right choice, and an infinite number of ways to make the wrong choice. If you want to model the choice of something as complex as a human being, you need a choice rubric, or else anything is a solution. A simple rubric is that consumers are rational. Bounded rationality provides others. You will not find one economist on earth who would agree with the statement "Every human being is perfectly rational."

If they are supplying a gift receipt with the gift, then the parents of the best friend will know that they went to a store with more expensive merchandise. The point of the gift was to impress the child's parents.

However, this DOES actually fit into the "Rational Consumer" theory. The "consumer preference" thing does not work, because both basketballs are exactly the same.

Another poster alluded to it. The purchase satisfies the Rational Consumer theory because the parents are acting in "THEIR" best interest by giving the ball that actually cost more than $10 to the best friend. They therefore 'FEEL' better about themselves for spending the proper amount of money expected of them even though they could have gotten it cheaper. That is in their psychological best interest.

No?

I thought that giving the $12 basketball was clearly rational. Keeping the $4 basketball was the violation.

Another Opinion wrote:

...They therefore 'FEEL' better about themselves for spending the proper amount of money expected of them even though they could have gotten it cheaper. That is in their psychological best interest.

Making decisions based on emotions is not rational. Emotions quite often cause people to act against their own best interest, and therefore irrationally.

Blowing.Rock Master wrote:

Making decisions based on emotions is not rational. Emotions quite often cause people to act against their own best interest, and therefore irrationally.

That's not true. The definition of a rational consumer (in economics, anyways) is one who chooses the option that makes herself best off. If her preferences include something about emotions, then it's completely possible for an emotional decision to be made by a rational consumer.

On that note, if the person gains utility from giving gifts over $10, it is plausible for this to be a rational consumer. If not, you need to better define your consumers' preferences.

Also, does giving the $4 basketball to their own child work better?

So if it makes me feel good to run up my credit cards buying crap, get a huge loan for an expensive car, and buy a huge house I can't afford, I'm acting rationally? Even though I know I can't pay for it and will go bankrupt? How is that in my best interest? If that's the economic definition of "rational", then the problem with classical economics is that the definition of "rational" is irrational.

Blowing.Rock Master wrote:So if it makes me feel good to run up my credit cards buying crap, get a huge loan for an expensive car, and buy a huge house I can't afford, I'm acting rationally? Even though I know I can't pay for it and will go bankrupt? How is that in my best interest? If that's the economic definition of "rational", then the problem with classical economics is that the definition of "rational" is irrational.

You're using an extreme case. Rationality can't be based on cold hard reason alone. Sure, it forms the ultimate basis for it but at the end of the day were are all emotional to some degree. Isn't it rational to accept there will be some deviation in what we desire?

Bottom line is, "yes." Our definition of "rational" is irrational in the strict classic sense. But that definition is suspect in that it dosen't apply to 98% of mankind.

Especially since it was based off of 18th century aristocratic and masculine social mores... in Europe.

Let me give you an equally extreme example. Let's say you get utility solely from owning things today. The future is of absolutely no importance to you (maybe you know you're going to die in 3 weeks or something). You could get an awesome house and cool cars next year, but you wouldn't care because next year is of absolutely no importance to you. Your example now becomes a rational choice. Granted this is pretty out there, but the idea is that it completely depends on how you decide to model the preferences of your consumer.

Now, the bigger issue (and the issue with the way this question was posed by the OP) is that at some point you need to take a stand on what exactly the consumer's preferences are. Without it, you can get almost any result you want as a rational choice. You and I just showed that with our combined example. The building of preferences is a much more difficult discussion to have.