LS7 - Decision Making In Economics

Question 1

How do firms make rational decisions

Answer 1

• They aim to maximise profit and produce minimal waste. They produce goods efficiently

Question 2

Utility

Answer 2

Utility is the satisfaction gained through the consumption of a product.

Question 3

How firms make rational decisions

Answer 3

They make rational decisions through maximising profit

Question 4

How producers make rational decisions

Answer 4

They make rational decisions through maximising their utility, their satisfaction gained through consuming a product

Question 5

How governments make rational decisions

Answer 5

Governments make decisions based on maximising social welfare

Question 6

What are the three main reasons as to why a firm, consumer or the government may not act rationally

Answer 6

• Information gaps. A lack of information and weakness at computation means that consumers are unable to process information
• Habitual Behaviour. The influence of habitual behaviour is that because people behave in a certain way for so long, they continue to do so even when it is irrational to do so
• People may be easily influenced by others where people may buy something to fit in but it may be irrational due to it not maximising utility

Question 7

Irrational Behaviours

Answer 7

Irrational behaviours are behaviours which do not maximise utility for a given economic agent

Question 8

To make rational behaviours, economic agent require

Answer 8

-Time
-Information
-Ability to process the information