1.2.1 Rational decision making

Question 1

Underlying assumptions of rational decision making

Answer 1

• Consumers aim to maximise utility
• Firms aim to maximise profit
• Governments aim to maximise social welfare
  This is the basis for economic thinking, but it is currently being questioned by behavioral economists. Economic agents do not always have the information necessary to act rationally and consumers do not always make calculated decisions.

Question 2

Consumers aim to maximise utility - assumptions of ration economic decision making

Answer 2

Utility is the satisfaction gained from consuming a product. The rational consumer is called Homo Economicus, who makes decisions by calculating the utility gained from each decision and chooses the one which will give them the most satisfaction.

Question 3

Firms aim to maximise utility - assumptions of rational economic decision making

Answer 3

Economic theory assumes that firms are run for their owners and shareholders and so aim to maximise profit in order to keep the shareholders happy.

Question 4

Governments aim to maximise social welfare - assumptions of rational economic decision making

Answer 4

Governments are voted in by the public and work for the public, so should aim to maximise their satisfaction by taking decisions which increase social welfare.