Behavioural Economics and rational decision making

Question 1

What are the assumptions of rational decision making

Answer 1

• consumers aim to maximise utility or satisfaction
• Producers aim to maximise profit
• Governments aim to maximise social welfare

Question 2

reasons why consumers may not act rationally

Answer 2

• Influences of other people
• Habitual behaviour
• consumer weakness at computation

Question 3

Reasons why producers may not act rationally

Answer 3

• imperfect information
• people lack self control requiring immediate satisfaction
• act for profit sufficiency not maximisation
• loss matters more than gains
• often fall back on simple rules of thumb and maintain status quo

Question 4

Habitual behaviour

Answer 4

consumers are prone to habitual behaviour so will often shop at the same place or purchase the same product despite it not being the best option

Question 5

How are consumers influenced by other consumers

Answer 5

consumers are very susceptible so social norms so will buy something that doesn’t maximise their personal utility but helps them to fit in with society

Question 6

Consumer weakness at computation explained

Answer 6

consumers may fail to examine long term implications and aren’t able to make complete price comparisons

Question 7

How does government exploit consumer behaviour

Answer 7

Nudging - making some alternatives easier than others
Framing - wording things differently
Restricted choices
Mandated choices