Individual economic decision making

Question 1

What is utility theory?

Answer 1

Utility theory refers to how consumers derive satisfaction (utility) from goods and services, focusing on total utility (overall satisfaction) and marginal utility (additional satisfaction from consuming one more unit).

Question 1

What is rational economic decision making?

Answer 1

Rational economic decision making assumes consumers aim to maximize their utility by making choices based on economic incentives, such as prices and income.

Question 2

What is the hypothesis of diminishing marginal utility?

Answer 2

It suggests that as more units of a good are consumed, the additional utility gained from each extra unit decreases.

Question 3

What is utility maximisation?

Answer 3

Utility maximisation occurs when a consumer allocates their resources to achieve the highest possible total utility, balancing marginal utility and price.

Question 4

Why is the margin important in decision making?

Answer 4

The margin is crucial because decisions are made by comparing marginal benefits to marginal costs, ensuring resources are allocated efficiently.