Chapter 3 - Theory of Consumer Demand

Question 1

Utility

Answer 1

level of satisfaction derived from the consumption of a certain quantity of a good

Question 2

Key Assumptions to study Consumer Behavior

Answer 2

1. Buyers are rational
2. More is preferred to less
3. Buyers seek to maximize their utility
4. Consumers act in self-interests & don’t consider the utility of others

Question 3

Indifference curve

Answer 3

1. Higher curves are preferred to lower ones.
2. Curves slope downward from left to right.
3. Curves do not cross
4. Curves are bound inward

Question 4

Effect of price change (indifference curves)

Answer 4

Question 5

Limited information-processing skills/abilities in valuating complex tasks

Answer 5

Consumer is too retarded to do maths

Question 6

Loss aversion

Answer 6

• Status-quo bias: Prefer the current state of affairs/situations
  -Endowment effect: More value to things they own

Question 7

Framing

Answer 7

80% fat-free feels better than 20% fat

Question 8

Limited use of information

Answer 8

-Limited attention
-Limited salience
-Wrong priors/beliefs about which information is relevant

Question 9

Anchoring

Answer 9

Recently received information appears to be relevant when making a decision

Question 10

Mental accounting

Answer 10

Tendency to separate money into different accounts based on subjective criteria

Question 11

Sunk Cost

Answer 11

Sunk Cost Fallacy

Question 12

Overconfidence

Answer 12

tendency to overstate the probability that certain events will occur when faced with relatively little information from memory

Question 13

Excess optimism

Answer 13

unrealistic belief that everything will be fine (e.g. exercise / save too little, procrastinate too much)

Question 14

Excess accuracy

Answer 14

unrealistic conviction of being able to predict results in a very precise way (e.g. more expensive data tariff than necessary)