1.2.1 Rational Decision-making

Question 1

What are the 2 assumptions of Neo-classical economics?

Answer 1

1. All consumers act rationally by aiming to maximise their utility
2. all firms act rationally by aiming to maximise profit

Question 2

Define the term utility

Answer 2

refers to the level of satisfaction consumers receive from the consumption of a good or service.

Question 3

What is the evaluative link for rational decision making?

Answer 3

may be a different outcome if the assumption of rational decision making is removed

Question 4

Define total utility

Answer 4

the total satisfaction from a given level of utility

Question 5

Define marginal utility

Answer 5

the change in satisfaction from consuming an extra unit of a good or service

Question 6

Explain diminishing marginal utility

Answer 6

as consumption increases the level of satisfaction derived from each additional unit diminishes/falls