Nudge Theory + Elasticity

Question 1

Anchoring Bias

Answer 1

Consumers have a reference point to determine whether something is good or not

Question 2

Framing Bias

Answer 2

Expressing information of a product in a positive or negative way

Question 3

Why is PED is different in a straight curve (2)

Answer 3

higher prices = consumers less willing to purchase + more sensitive to price changes

lower prices = consumers more willing to purchase + less sensitive to price changes

Question 4

Is PED the same throughout a curve (2)

Answer 4

No

higher prices = higher PED

lower prices = lower PED

Question 5

Define specific tax (2)

Answer 5

fixed amount of tax imposed on a product

vertical shift upwards of supply curve

Question 6

Define percentage tax (2)

Answer 6

tax is a percentage of price

supply curve is more inelastic

Question 7

Define incidence of taxation

Answer 7

distribution of burden of indirect tax

Question 8

Consumer tax burden on graph

Answer 8

top part of tax

Question 9

Producer tax burden on graph

Answer 9

bottom part of tax

Question 10

Incidence of taxation for products with elastic demand (2)

Answer 10

producers bear most of tax

producers cant pass on tax as it will lower demand significantly

Question 11

Incidence of taxation for products with elastic supply

Answer 11

more of tax borne by consumers

Question 12

Incidence of taxation for products with inelastic demand (2)

Answer 12

consumers bear most of tax

producers can pass on most of tax in the form of higher price as it will not reduce demand much

Question 13

Incidence of taxation for products with inelastic supply

Answer 13

more tax borne by producers

Question 14

Define neoclassical theory

Answer 14

the assumption that human behaviour is completely rational + utility-maximising

Question 15

Limitations of neoclassical theory (4)

Answer 15

cognitive bias

bounded rationality

bounded self-control

bounded selfishness

Question 16

Features of cognitive bias (4)

Answer 16

rule of thumb - mental shortcuts to help people make quick decisions to a complex choice

Question 17

Framing bias

Answer 17

decisions influenced based on how choices are presented to consumers

Question 18

Availability bias

Answer 18

consumers rely on information that is more readily available

Question 19

Features of bounded rationality (2)

Answer 19

idea that consumers are bounded by information and cannot be ideally rational

consumers seek satisfactory outcome rather than best one

Question 20

Features of bounded self-control

Answer 20

consumers do not have sufficient amounts of self-control to make rational decisions

Question 21

Features of bounded selfishness (2)

Answer 21

consumers selfish within limits

willing to be selfless at the cost of reduced personal welfare

Question 22

Define nudge theory (3)

Answer 22

method to influence consumer behaviour in a predictable way

without limiting choice

e.g healthy foods placed in more visible areas of stores

Question 23

Default choice architecture (2)

Answer 23

option that results from not doing anything

consumers make these choices due to lack of interest or laziness

Question 24

Restricted choice architecture (3)

Answer 24

choice limited by govenrment/authority

e.g age restrictions on smoking

encourage people to make choices with socially beneficial outcomes