Economic Objectives And Rationality

Question 1

What does the law of diminishing marginal utility

Answer 1

That for each additional unit of a good that’s consumed, the marginal utility gained decreases.

Question 2

A rational consumer

Answer 2

Will choose to consume a good at the point where marginal utility = price

Question 3

Why do firms want to make a profit

Answer 3

So they can survive, offer rewards to the owner and staff, profit can be reinvested to help expand

Question 4

Why may firms want to maximise sales

Answer 4

• A larger market share (lead to some monopoly powers) to charge higher prices
• To be more prestigious and stable to attract the best employees

Question 5

What are the aims of consumers

Answer 5

Maximise utility:

• Some want to save for pensions or spend money on holidays
• Assumed they will act rationally

Consumers can also act as workers-maximise income while having free time

Question 6

What are the aims of the government

Answer 6

To balance resources with needs and wants to encourage:
Economic growth
Full employment
Equilibrium in the bop 
Low inflation 
(Reality-competing objectives)

Question 7

What is asymmetric information

Answer 7

When one party has more information than the other in a transaction (prevents rationality)

Question 8

Reasons why consumers don’t act rationally

Answer 8

• habitual behaviour
• weakened at computation (not process info)
• social norms
• consumer inertia: too busy to change or resistant to change