26-Rational Decision Making

Question 1

State the Assumption of Rationality in Decision-Making

Answer 1

• Rational Consumers will Aim to Maximize their Utility
• Firms Act Rationally by aiming to maximize Profits

Question 2

State the Reasons Why Consumers May Not Aim To Maximize Their Utility

Answer 2

• The Influence of other people’s Behavior ( Herding )
• Importance of Habitual Behavior
• Inertia
• Consumers are Poor at Computation
• The Need to feel Valued
• Framing Effect

Question 3

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- The Influence of other people’s Behavior ( Herding )

Answer 3

Consumers are often Influenced by the Behavior of others. They may be Influenced by their Friends or Peers and their Purchases in an effort to fit in
This may mean that People may not switch for better returns as their Friends and Family may also switching

Question 4

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- Importance of Habitual Behavior

Answer 4

Consumers Develop particular buying Habits that affect their ability to make Rational Choices. They Become Loyal to a Brand and continue to buy it habitually. They are acting Irrationally by not Switching to Achieve Better returns.
Eg- Some Consumers do not switch their Savings account to another bank, even when other banks offer higher rates of Interest

Question 5

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- Inertia

Answer 5

Even when people are always aware that there might be a better alternative they do not Change because of Inertia
Eg- Some Consumers change their electricity or gas suppliers even when other supplier offer a lower price
Consumers may not have the energy to go through the process of searching for & transferring to another suppliers as there may be too much complex information, Time wasted in filling out forms etc

Question 6

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- Consumers are Poor at Computation

Answer 6

Consumers lack good Computation skills and find it difficult to Calculate the Savings from Switching. Those with such Skills are more likely to change suppliers than those without
Eg- Many Consumers never switch to another Supplier despite the Possibility of lower Electricity Bills because they often found it difficult to Calculate whether another Supplier would be cheaper

Question 7

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- The Need to feel Valued

Answer 7

Consumers need to feel Accepted and Respected by People around them. Customers may feel valued by their Current Supplier so they continue to remain with them

Question 8

Elaborate the Reasons Why Consumers May Not Aim To Maximize Their Utility
- Framing Effect

Answer 8

It states that Consumers can be Influenced by the way Information is Presented. This can make it Harder for Consumers to make Rational Choice
Eg- Presenting Life Insurance Premium Payments as ‘Less than $3 per day’ sounds attractive to Consumers than ‘$1000 per year’