Microeconomics (4.1.2.1)

Question 1

Define “economic agent”

Answer 1

Anyone who takes a decision to allocate scarce resources.

Question 2

Who can be an economic agent?

Answer 2

An individual person, firm or government.

Question 3

Define “rational economic agent”

Answer 3

A decision maker who identifies the best option that maximizes utility.

Question 4

Define “behavioral economics”

Answer 4

The study of psychology as it relates to the economic decision-making processes of individuals and institutions.

Question 5

Define “traditional economic theory”

Answer 5

A traditional economy is a system that relies on customs, history, and time-honored beliefs, and where economic agents are assumed to be utility-maximizers and rational in their actions

Question 6

Define “behavioral economics”. (DETAILED)

Answer 6

A branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 7

State the characteristics of rational behavior

Answer 7

• Using all available information
• Trying to maximize utility (satisfaction)
• Independent choices (unbiased choices)
• Stable preferences (Choices that don’t change over time)

Question 8

Define “rational behavior”

Answer 8

Decision making process that is based on making choices that result in the maximum level of utility, not the optimum level.

Question 9

State reasons why people don’t always have rational behavior.

Answer 9

• Limited computational capacity (Due to complex products in a complex world)
• Emotions sometimes overtake emotions
• Altruism (Interested for the well being of others) and no pure self interest so they tend to optimize utility instead of maximizing for themselves
• Desire for instant rewards (Impulsive)
• People tend to stick to default choices
• Social networks influence their choices

Question 10

Define utility

Answer 10

Satisfaction gained from consumption of a good/service

Question 11

Define marginal utility

Answer 11

Extra satisfaction gained from consumption of one more unit of good/service

Question 12

Define total utility

Answer 12

All the utility gained from the consumption of a good/service.

Question 13

Define diminishing marginal utility

Answer 13

When the increase in marginal utility starts to decrease, (However, it is not diminishing when the Mu < 0)

Question 14

Define equi-marginal principle

Answer 14

Allocating available resources to get optimum benefits - having a compromise between different products which require different amounts/types of resources.

Question 15

What does the equi-marginal principle show?

Answer 15

This principle provides a basis for the maximum utilization of all the inputs of a firm so as to maximize the profitability.

Question 16

What are the assumptions in the equi-marginal principle

Answer 16

• Consumer income is fixed
• Prices are fixed
• Tastes and preferences are fixed
• Consumers are able to perform utility calculations

Question 17

Define consumer utility

Answer 17

Satisfaction a consumer obtains from the consumption of a good/service

Question 18

State the relationship between consumer utility and the marginal utility per currency.

Answer 18

Consumer utility is maximized when the marginal utility per currency for all goods is equal.

Question 19

Define marginal utility per currency

Answer 19

The amount by which an individual’s utility would be increased if given a small quantity of additional money.