Chapter 2.6

Question 1

Assumptions of rational consumer choice

Answer 1

Consumers make purchasing decisions according to their tastes and preferences
Consumers have perfect information about all their alternatives so that there is no uncertainty
Consumers maximize their utility

Question 2

Bias

Answer 2

Systematic errors in thinking or evaluating, and are departures from normal standards of thought or judgement

Question 3

Biases that affect consumer choices

Answer 3

Rules of thumb
Anchoring
Framing
Availability

Question 4

Rules of thumb

Answer 4

Simple guidelines based on experience and common sense that simplify complicated decisions

Question 5

Anchoring

Answer 5

The use of irrelevant information to make decisions which often occurs due to its being the first piece of information that the consumer happens to come across

Question 6

Framing

Answer 6

How choices are presented to decision-makers

Question 7

Availability

Answer 7

Information that is most recently available which people tend to rely on more heavily though there is no reason to expect that this information is any more reliable than other information

Question 8

Bounded rationality and what limits rationality

Answer 8

The idea that consumers are rational only within limits, as consumer rationality is limited by consumers’ insufficient information, the costliness of obtaining information and the limits of the human mind to process large amounts of information

Question 9

Bounded self-control

Answer 9

The idea that people in reality only exercise self-control only within limits

Question 10

Bounded selfishness

Answer 10

The idea that people are selfish only within limits

Question 11

Nudge

Answer 11

A method designed to influence consumers’ choices in a predictable way without freeing financial incentives or imposing sanctions and without limiting choice

Question 12

Choice architecture

Answer 12

The design of particular ways or environments in which people make choices

Question 13

Default choice

Answer 13

A choice that is made by default, which means doing the option that results when one does not do anything

Question 14

Restricted choice

Answer 14

A choice that is limited by the government or other authority

Question 15

Mandated choice

Answer 15

A choice between alternatives that is made mandatory by the government or other authority

Question 16

Default choice, restricted choice and mandated choice are different types of __ within choice architecture

Answer 16

Nudges

Question 17

What is the intention of choice architecture?

Answer 17

To work toward influencing people’s choices in a direction held to be socially desirable

Question 18

Potential advantages of behavior economics in economic policy

Answer 18

May be a relatively simple and low-cost way to influence people’s behavior to act in socially desirable ways
Has been used successfully in a number of areas
Offer freedom of choice without forcing people to do anything or preventing them from doing anything
May be able to overcome the weaknesses of the theory of consumer behavior
Are based on principles of psychology which have been tested over many years
Policy development is based on trials, indicating use of flexible trial-and-error methods

Question 19

Potential disadvantages of behavioral economics in economic policy

Answer 19

Is not based on any understanding of human behavior so can’t lead to a systematic and unifying theory
The unsystematic approach may not be valid over time or across different groups
Has risks of using psychological principles to manipulate consumers
Has risks that behavioral policies may be used as substitutes for necessary but politically costly economic policies
Traditional economic policies may be more effective
May be a new form of government regulation camouflaged under the guise of freedom of choice
May successfully affect people’s choices but might not reflect their true preferences

Question 20

Rational producer behavior

Answer 20

The theory that firms are guided by the goal to maximize profit

Question 21

Corporate social responsibility

Answer 21

Firms engaging in socially beneficial activities

Question 22

Market share

Answer 22

The percentage of total sales in a market that is earned by a single firm

Question 23

Incentives for growth maximization

Answer 23

A growing firm can achieve economies of scale and lower average costs, increasing profitability
A growing firm can diversify into different products and markets to reduce its dependence on a single product or market
Larger firms have greater market power and increased ability to influence prices
Largest firms reduce the risks of being affected in a recession or be taken over
Growth maximization reconciles the interests of both owners and managers

Question 24

Satisficing

Answer 24

The idea that firms try to achieve a satisfactory level of profits together with satisfactory results for many objectives rather than optimal or best results for any one objective. Also used in consumer behavior