A-level Consumer Behaviour

Question 1

Many economic theories assume that economic agents

Answer 1

act rationally attempting to maximise their own narrow self-interest

Question 2

Homo economicus is sometimes associated with

Answer 2

18th century thinkers such as Adam Smith

Question 3

Rational decision making is

Answer 3

when individuals compare the costs and benefits of possible decisions and choose the one which maximises their personal net benefit

Question 4

It is usually, often implicitly, assumed that the individual has

Answer 4

has perfect information and has the ability to calculate and weigh up the consequences of each available choice.

Question 5

Utility

Answer 5

is the satisfaction/happiness or economic welfare an individual gains from consuming a good or service

Question 6

Total utility

Answer 6

is the aggregate amount of satisfaction an individual derives from consuming a good or service

Question 7

Marginal utility

Answer 7

is the additional welfare, satisfaction or pleasure an individual derives from consuming one extra unit of a good or service

Question 8

As consumption increases, total utility…

Answer 8

rises at first and then starts to diminish

Question 9

As consumption increases, marginal utility…

Answer 9

diminishes giving us diminishing marginal utility

Question 10

The hypothesis of diminishing marginal utility

Answer 10

As a person increases consumption of a good or service – while keeping consumption of other products constant – there is a decline in the marginal utility derived from consuming each additional unit of the good.

Question 11

The hypothesis of diminishing marginal utility supports the downward sloping demand curve since…

Answer 11

If increased consumption of a good or service provides lower amounts of marginal utility, then it is therefore logical that a rational consumer will be prepared to pay only a lower price for the second good than the first, a lower price for the third good and so on. This leads to a demand curve that slopes downwards from left to right.

Question 12

Utility maximisation is

Answer 12

is where consumers choose the basket of goods and services that will maximise their total utility, subject to the constraint imposed by their limited income.

Question 13

constraints

Answer 13

• a given set of prices
• limited time available
• With limited income and a set of prices faced, consumers are faced with a budget constraint – they can only purchase more of one good by giving up consumption of another, which represents the opportunity cost of consumption

Question 14

To be sure they are maximising their utility, consumers can compare the

Answer 14

MB (marginal utility) they gain to the MC of the decision (the price ie the opportunity cost)

Question 15

Logically consumers will buy if

Answer 15

if MB>MC and keep buying until MB=MC (ie MU=P) – at this point total satisfaction is maximised