Chapter 2

Question 1

What is rational behaviour

Answer 1

Acting in pursuit of self interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed

Question 2

What is utility

Answer 2

The satisfaction or economic welfare an individual gains from consuming a good or service

Question 3

What is marginal utility

Answer 3

The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service

Question 4

What is the hypothesis of diminishing marginal utility

Answer 4

For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed

Question 5

What is asymmetric information

Answer 5

When one party to a market transaction possesses less information relevant to the exchange than the other

Question 6

What is behavioural economics

Answer 6

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions

Question 7

What is bounded rationality

Answer 7

When making decisions individuals’ rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make decisions

Question 8

What is bounded self control

Answer 8

Limited self control in which individuals lack the self control to act in what they see as their self interest

Question 9

What is cognitive bias

Answer 9

Is a systematic error in thinking that affects the decision and judgements that people make

Question 10

What is availability bias

Answer 10

Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events

Question 11

What is anchoring

Answer 11

A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered. Individuals use an initial piece of information when making subsequent judgements

Question 12

What are social norms

Answer 12

Forms or patterns of behaviour considered acceptable by a society or group within that society

Question 13

What are nudges

Answer 13

Factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms

Question 14

What is altruism

Answer 14

Concern for the welfare of others

Question 15

What is fairness

Answer 15

The quality of being impartial just or free of favouritism.

Question 16

What is choice architecture

Answer 16

A framework setting out different ways in which choices can be presented to consumers and the impact of that presentation on consumer decision making

Question 17

What is default choice

Answer 17

An option that is selected automatically unless an alternative is specified.

Question 18

What is framing

Answer 18

How something is presented influences the choices people make

Question 19

What is mandated choice

Answer 19

People are required often by law to make a decision

Question 20

What is restricted choice

Answer 20

Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices people may may make poorly though out decision or not make any decision

Question 21

What is the point of satiation

Answer 21

When marginal utility is zero, total utility is maximised

Being “full up”

Question 22

Traditional economic theory assumes that if individuals possess perfect information

Answer 22

They will make decisions that maximised their welfare

Question 23

One of the ways in which asymmetric information can manifest itself is through the process know as

Answer 23

Adverse selection

Question 24

What does George Akerlof market for lemons describe

Answer 24

The problem of asymmetric information possessed by buyers and sellers “lemon” being American slang for a poor quality car

Question 25

In 2010 the Uk government set up

Answer 25

Behavioural insights team, marked the growing influence of behavioural economics

Question 26

In complex choice situations bounded rationality often results in

Answer 26

Satisficing rather than maximising choices

Question 27

What is the term used by humans to help the make sensible decisions on limited information

Answer 27

Rules of thumb

Question 28

An example of a positive social norm

Answer 28

Social attitudes have altered towards smoking in the last 30 years

Question 29

What are economic sanctions

Answer 29

Include restrictions imposed by regulations and /or laws that restrict and individuals freedom to behave in certain ways.
Sanctions such as the smoking ban maybe be more effective at changing behaviour

Question 30

Example of default choice

Answer 30

Opt in

Opt out for blood and donor transplant

Question 31

Example of framing

Answer 31

90% fat free v 10% fat

Question 32

What is a nudge

Answer 32

Provides information for people to respond to
Create positive social norms
Opt out schemes rather than opt in
Active choosing by individuals

Question 33

What is a shove

Answer 33

Uses taxation and subsidies to create incentives and on occasion in the case of taxes to punish people
Uses fines, laws banning activities and regulations