4.1.2 Individual Economic Decison Making (including KW)

Question 1

What is the utility theory for consumers and firms?

Answer 1

Consumer aim to maximize their utility
Firms aim to maximise their profit

Question 2

What is a consumer’s utility?

Answer 2

The total satisfaction received from consuming a good or service

Question 3

What is marginal utility?

Answer 3

The extra satisfaction derives from consuming one extra unit of the good

Question 4

Why is the demand curve downward sloping?

Answer 4

Because of the law of diminishing marginal utility
caused by an extra unit generating less utility than one already consumed
Which makes consumers want to pay less

Question 5

What is utility maximization for firms and consumers?

Answer 5

When consumers aim to generate the greatest utility possible for an economic decision
When firms aim to generate the highest profits possible

Question 6

Why is utility maximization not applicable for all firms?

Answer 6

Some firms may have philanthropic owners who seek to maximize the utility of others

Question 7

What happens when incentives are not given properly?

Answer 7

Resources are misallocated

Question 8

What do prices do?

Answer 8

Provide signals for buyers and sellers
Which is an incentive to purchase or sell the good

Question 9

What does symmetric information mean?

Answer 9

It means that’s consumers and producers have perfect market information to make their decisions
Which leads to an efficient allocation of resources

Question 10

What could imperfect information cause?

Answer 10

• consumers might pay too much or too little
• firms might ptoidce the incorrect amount

Question 11

What does asymmetric information mean?

Answer 11

• There is unequal knowledge between the consumers and the producers
• which leads to market failure

Question 12

How could information be made more widely available?

Answer 12

Through advertising
Through government intervention

Question 13

What does bounded rationality and bounded self control mean?

Answer 13

Individuals are rational decision makers who endeavor to maximize their utility

Question 14

What biases do consumers face when making decisions?

Answer 14

• anchoring - relying on the first piece of information they are given
• availability - basing decisions on events that were recent and memorable which cause overestimations due to emotions
• social norms

Question 15

What is altruism?

Answer 15

The cat of being selfless and considerate towards other people

Question 16

What is choice architecture?

Answer 16

The way choices are represented to consumers

Question 17

What is choice framing?

Answer 17

The way by which consumers are influenced by the context of how a choice is presented

Question 18

What do nudges do?

Answer 18

Aim to change the behavior of consumers without taking away their freedom of choice

Question 19

What is a default choice?

Answer 19

When a consumer is automatically enrolled in a system
Eg. pension schem

Question 20

What is a mandated choice?

Answer 20

When consumers are requires or state wether they wish to participate in an action
Eg. organ donation

Question 21

What is a restricted choice?

Answer 21

When the consumer is offered some alternatives rather than a wide range

Question 22

What is homo economicus?

Answer 22

A hypothetical person who behaves in exact accordance with their rational self-interest

Question 23

What is risk aversion?

Answer 23

When individuals value losses more than commensurate gains

Question 24

What are heuristics ?

Answer 24

Rules of thumb