1.2.1 Rational Decision Making

Question 1

What is the aim of rational consumers?

Answer 1

Rational consumers make choices with the aim of maximising utility (satisfaction or benefit) from purchasing and consuming goods and services using a limited budget.

Question 2

What does the rational choice model assume?

Answer 2

• Consumers choose independently (my preferences do not affect your choices)
• A consumer has fixed and consistent tastes and preferences; so, if A is preferred to B and B is preferred
  to C, then A is preferred to C (technically, this is called ‘transitive preferences’)
• Consumers gather complete information on the alternatives
• Consumers always make an optimal choice given their preferences

Question 3

What is utility?

Answer 3

Utility measures the satisfaction we get from purchasing and consuming a product. Most economists assume
that all ‘economic agents’ (i.e. consumers, producers, etc.) aim to maximise their utility. For businesses, this
means maximising their profit.

Question 4

What is total utility?

Answer 4

The total satisfaction from a given level of consumption

Question 5

What is marginal utility?

Answer 5

The change in satisfaction from consuming an extra unit

Question 6

What is diminishing marginal utility?

Answer 6

Standard theory believes in diminishing returns i.e. the marginal utility of extra
units decline as more is consumed. In other words, suppose that you buy a packet of crisps – eating the crisps
gives you a certain amount of satisfaction, or utility. Suppose you now buy a second bag – eating the crisps
still gives you some utility, but not as much as the first bag gave you.