Chapter 6: Rational Decision Making

Question 1

Behaviourial economics

Answer 1

A branch of economics that accepts that consumers and other economic agents do not always act rationally and looks at why this might be so

Question 2

Economic welfare

Answer 2

The level of well-being and or prosperity or living standards of an individual or group of individuals such as a country

Question 3

In RDM, consumers aim to maximize..

Answer 3

Utility (satisfaction obtained by consumption of a good or service)

Question 4

In RDM, firms aim to maximize..

Answer 4

Profit

Question 5

What is RDM

Answer 5

When economic agents consider the outcome of their choices and act in their best interest

Question 6

Why may consumers not aim to maximize utility?

Answer 6

• Herding (influence of other people’s behavior)
• Habitual behavior (especially addictions)
• Inertia (resistance to change; when the effort required to make the best decision by switching is too great)
• Poor computational/calculation skills (they may not be able or willing to make comparisons between prices and different goods on offer)
• The need to feel valued by society
• Framing and bias (economic statements or choices are often worded in such a way to influence the outcome, especially in marketing)