Behavioural Economics Pt2

Question 1

Why may economic agents not maximise utility?

Answer 1

imperfect information.

Question 2

What are the 2 types of imperfect information and explain them

Answer 2

Lack of info. This is where the info is missing or not present leading to potential under or over consumption.
EG: Merit goods

Asymetric Info. This is where the info exists but is not being shared equally.
EG: second hand car market where only seller has all the info

Question 3

What do traditional economists state?

Answer 3

They argue that consumers will gather and evaluate information to then make a utility maximising decision.

Question 4

What do behavioural economists argue?

Answer 4

They dispute rationality and utility maximisation arguing that emotional, social, and psychological factors can influence decision making.

Question 5

Why do behavioural economist say that consumers are not always rational?

Answer 5

Bounded rationality- consumers may not have the time to evaluate and gather info to make a decision. Also info may not exist and there could be assymetric info
Bounded self-control- even if consumers have all the info, they may lack self control. EG: drinking sugary drinks
Heuristics -rule of thumb, where by they make satisficing decisions rather than maxing utility