U1 AOS3 - Difference Between Traditional Economics and Behavioural Economics

Question 1

Traditional View of Consumers

Answer 1

• Ordered preferences
• Acts rationally - by aiming to maximise their utility
• Is fully informed

Question 2

True/False

Under the traditional view of consumers, consumers never act on impulse or emotion when making decision

Answer 2

True

Question 3

True/False

Under the traditional view of consumers, consumers only make decisions that maximise their utility

Answer 3

True

Question 4

True/False

Budget constraints only apply to consumers in the traditional viewpoint

Answer 4

False

Question 5

In contrast to the traditional viewpoint of consumers, which suggests that consumers always act rationally, behavioural economics suggests…

Answer 5

that consumers have bounded rationality =

consumers are not always able to make the most rational/utility maximised decisions due to:
* Lack of information
* Complexity and cognitive limitations
* Time constraints

Question 6

In contrast to the traditional viewpoint of consumers, which suggests that consumers always have full control over their decision making, behavioural economics suggests…

Answer 6

that consumers have bounded willpower =

consumers are emotional and often succumb to urges and impulses so do not exercise full self control over their decision making

Question 7

In contrast to the traditional viewpoint of consumers, which suggests that consumers only narrowly seek to maximise their self interest, behavioural economics suggests…

Answer 7

that consumers have bounded self interest =

consumers care about fairness when making decisions

Question 8

Key Point of Difference between Traditional and Behavioural Economics

Answer 8

The rigidity/certainty/absoluteness of assumptions about consumer behaviour.

Traditional economics suggests that consumers always seek to act rationally and maximise their utility; whereas, behavioural economics suggests that while utility maximisation is still a goal, consumers are not always able to achieve it.

Question 9

True/False

The behavioural economics model does not suggest utility maximisation is the goal of consumers

Answer 9

False.

Utility maximisation remains the goal but behavioural economics outlines the barriers and limitations to achieving it

Question 10

True/False

Consumers can never act fully rationally

Answer 10

False.

Consumers can act fully rationally, but need to have full information, sufficient time and need to be aware of their biases and be able to overcome limitations in their judgement

Question 11

In the behavioural economics model, consumers do not always act rationally due to:

A. sufficient information being available
B. a lack of time
C. optimal analytical and academic skills
D. an ability to compare all options
E. overcoming biases

Answer 11

B