1.2.1- Rational Decision Making

Question 1

What is the rational choice theory?

Answer 1

Assumes that consumers always behave rationally in allocating their limited budgets between different products to maximise utility

Question 2

What do firms aim to maximise?

Answer 2

Maximise profit to keep shareholders happy

Question 3

What do governments aim to maximise?

Answer 3

To maximise social welfare

Question 4

What are the limitations of the rational choice theory?

Answer 4

-economic agents don’t always have the information to act rationally
-consumers don’t always make calculated decisions

Question 5

What is marginal utility?

Answer 5

The additional satisfaction gained from consuming one more of the good

Question 6

What is the law of diminishing marginal utility?

Answer 6

As a person consumes more units of a good/service while keeping the consumption of other goods constant, the additional satisfaction gained from each additional unit will decrease

Question 7

What does the law of diminishing marginal utility support?

Answer 7

A downward sloping demand curve, where consumers are willing to pay less for each subsequent unit of a good