Behavioural Economics

Question 1

Explain 4 ways consumers and producers act contrary to economic theory?

Answer 1

1. Bounded rationality
   Consumers are rational within limits
   Our mental capacity is limited and we can’t always make accurate decisions to maximize utility
   (consumer sometimes make judgments based on how things are presented (people will buy jeans at a higher price from studio 88, instead of the identical jeans in a discount store)
2. Bounded self-control
   People practice self-control within limits
   Sometimes people spend to much or too limit or work to much or too little
   Sometimes we buy ridiculous things
3. Bounded selfishness
   People are greedy only to a limit
   Paying more than you actually need to - paying a worker who earn almost nothing (white guilty)
4. Availability - most recent information
   Consumers don’t always have access to this information
   Availability about prices (something at shop rite is cheaper at pick and pay)

Question 2

State assumptions of Consumer rationality?

Answer 2

1. Have perfect information
2. Want to maximize utility
3. Perferen=bce amongst alternative choices are consistent
4. Consumers always prefer more of a good than less

Question 3

Nudge theory

Answer 3

a method designed to influence consumers decision making in a predictable way without providing financial incentivizes or imposing sanctions and limiting choices

(some economists would argue —- nudges are manipulative & weaken idea of free choice)

Question 4

Give Examples of Nudges

Answer 4

General Example:
1. Placing healthy food in an easily visible & accessible place in a store

2. Goverment advertisement — instrument that leads to positive externality

Question 5

State advantages and disadvantages of behavioural economic theory

Answer 5

Advantages

1. Could provide a simple & low-cost way to influence people to act in a way that’s socially desirable to society
2. Overcomes weakens of consumer rationality — assumed in economic theory

Disadvantages
1. Is only an emerging field (Not developed)
unable to create a consensus globally regarding consumer behavior

2. Risk of using psychological principles to manipulate people
   (endanger freedom of choice)