Microeconomics, part 1- Individual Economic Decision Making

Question 1

Graph of FC:

Answer 1

Horizontal line

Question 2

Graph of AFC:

Answer 2

Downwards curve

Question 3

Graph of VC:

Answer 3

Straight line going up

Question 4

Graph of AVC:

Answer 4

Curve down a little then up (Nike tick)

Question 5

Why does the graph for AVC go down at first?

Answer 5

Because of the fixed element

Question 6

In terms of costs, when will firms produce in the short run?

Answer 6

Provided revenue is grater than or equal to variable costs

Question 7

In terms of costs, where will firms produce in the long run?

Answer 7

When revenue is grater than or equal to total costs

Question 8

Average cost definition:

Answer 8

Cost per unit

Question 9

Marginal cost definition:

Answer 9

The additional cost to the total of the next unit

Question 10

When is total revenue the highest?

Answer 10

When MR=0

Question 11

Rational behaviour definition:

Answer 11

Acting in pursuit of self interest, which for a consumer means attempting to maximise the welfare, satisfaction and utility gained from the goods and services consumed

Question 12

What does calculating welfare require?

Answer 12

A value judgement

Question 13

Utility definition:

Answer 13

The satisfaction or economic welfare an individual gains from consuming a good or service

Question 14

What is the measure of utility?

Answer 14

There is no measure

Question 15

Marginal utility definition:

Answer 15

The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good

Question 16

Information gap definition:

Answer 16

When people do not posses or they ignore relevant information, leading them to make poor (irrational) decisions

Question 17

Asymmetric information definition:

Answer 17

When one party in an economic transaction posses less information relevant to the exchange than the other

Question 18

Behavioural economics definition:

Answer 18

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

Question 19

Bounded rationality:

Answer 19

When making decisions an individual’s rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make decisions

Question 20

Bounded self control definition:

Answer 20

Limited self control in which individuals lack the self control to act in what they see as their self interest

Question 21

Cognitive bias definition:

Answer 21

A mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rules of thumb pr holding onto one’s preferences and beliefs, regardless of contrary information. Decisions are made on the bias of one’s own likes, dislikes and past experiences

Question 22

Anchoring definition:

Answer 22

A cognitive bias describing the human tendency to rely too heavily on the first piece of information offered

Question 23

Availability definition:

Answer 23

Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events

Question 24

Social norms definition:

Answer 24

Forms or patterns of behaviour considered acceptable by a society or a group within that society

Question 25

Altruism definition:

Answer 25

Concern for the welfare of others

Question 26

Choice architecture definition:

Answer 26

A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making

Question 27

What are the types of choice architecture?

Answer 27

• Framing
• Loss aversion
• Nudge
• Default choice
• Mandated choices
• Restricted choices

Question 28

Framing (choice architecture) definition:

Answer 28

How something is presented influences the choices people make

Question 29

Loss aversion (choice architecture) definition:

Answer 29

People’s tendency to prefer to avoid potential losses rather than to acquire potential gains

Question 30

Nudge (choice architecture) definition:

Answer 30

Tries to alter people’s behaviour in a predictable way without forbidding any options or significantly changing incentives

Question 31

Default choice (choice architecture) definition:

Answer 31

An option that is selected automatically unless an alternative is specified

Question 32

mandated choices (choice architecture) definition:

Answer 32

People are required by law to make a decision

Question 33

Restricted choices (choice architecture) definition:

Answer 33

Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation