Microeconomics (4.1.2.3)

Question 1

Define a negative incentive

Answer 1

They are “shoves” that leave you worse off financially or socially. BUT, they help deter people from doing bad things.

Question 2

Define a disincentive

Answer 2

A factor, especially a financial disadvantage, that discourages a particular action.

Question 3

Define negative externalities of resources

Answer 3

When production and consumption impose external costs on third parties outside of the market for which no appropriate compensation is needed.

Question 4

Behavioral economic theory

Answer 4

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices.

Question 5

Define the “dual system theory”

Answer 5

This is a concept that individuals have two different sets of decision-making processes. The first is impulsive, fast and acts without thinking.

Question 6

Explain how to “dual system theory” works

Answer 6

There are two systems - system 1 and 2.

• System 1 (Adaptive unconscious) is impulsive, fast, emotional and acts without thinking – but relies on heuristics and past knowledge/experience.
• System 2 (Considered deliberate) is a more cognitive, deliberate, thinking process which can take in a greater range of data than just our own experience.

Question 7

Who proved the “dual system theory” reflected economic agent behaviour?

Answer 7

Daniel Kahneman and Amos Tversky in 1979.

Question 8

How many “systems” are presented in the dual system theory and what are they called?

Answer 8

2 systems

System 1: Adaptive unconscious
System 2: Considered deliberate

Question 9

Explain System 1 in the dual system theory

Answer 9

(Adaptive unconscious) is impulsive, fast, emotional and acts without thinking – but relies on heuristics and past knowledge/experience.

Question 10

Explain System 2 in the dual system theory

Answer 10

(Considered deliberate) is a more cognitive, deliberate, thinking process which can take in a greater range of data than just our own experience.

Question 11

What does the “dual system theory” tell us about agent behaviour when challenged with a complex problem?

Answer 11

They use system 2 but due to computational weakness in a world of complexity, they often revert to to system 1 and judge based on heuristics.

Question 12

Define bounded rationality

Answer 12

When consumers/firms do not have sufficient information to make fully-judged decisions, so they tend to rely on heuristics and “satisfice” instead of maximizing

Question 13

Define “satisfice”

Answer 13

When a consumer only pursues a course of action that will satisfy the minimum requirements necessary to achieve a particular goal.

Question 14

Define bounded self control

Answer 14

The idea that individuals are able to exercise self-control when presented with certain choices.

Question 15

Define heuristic

Answer 15

A method that shortens the process to make a decision and often relies on rule of thumb.

Question 16

Do heuristics “satisfice” or “maximize”?

Answer 16

Satisfice

Question 17

Give another term for traditional economic behaviour

Answer 17

Orthodox economic behaviour

Question 18

Define bias

Answer 18

An irrational assumption or belief that affects the ability to make a decision based on facts and evidence

Question 19

Define cognitive bias

Answer 19

A systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make.