Nudge Theory

Question 1

Anchoring Bias

Answer 1

Consumers have a reference point to determine whether something is good or not

Question 2

Inertia Bias

Answer 2

Consumers are overflooded with so much options they decide to stick with same product

Question 3

Framing Bias

Answer 3

Expressing information of a product in a positive or negative way

Question 4

Why is PED is different in a straight curve (2)

Answer 4

higher prices = consumers less willing to purchase + more sensitive to price changes

lower prices = consumers more willing to purchase + less sensitive to price changes

Question 5

Is PED the same throughout a curve (2)

Answer 5

No

higher prices = higher PED

lower prices = lower PED

Question 6

Income elasticity of demand equation

Answer 6

percentage change in quantity demanded/percentage change in income

Question 7

YED for luxury goods

Answer 7

> 1

Question 8

YED for normal goods

Answer 8

0 < YED < 1

Question 9

YED for inferior goods

Answer 9

negative

Question 10

Define specific tax (2)

Answer 10

fixed amount of tax imposed on a product

vertical shift upwards of supply curve

Question 11

Define percentage tax (2)

Answer 11

tax is a percentage of price

supply curve is more inelastic

Question 12

Define incidence of taxation

Answer 12

distribution of burden of indirect tax

Question 13

Consumer tax burden on graph

Answer 13

top part of tax

Question 14

Producer tax burden on graph

Answer 14

bottom part of tax

Question 15

Incidence of taxation for products with elastic demand (2)

Answer 15

producers bear most of tax

producers cant pass on tax as it will lower demand significantly

Question 16

Incidence of taxation for products with elastic supply

Answer 16

more of tax borne by consumers

Question 17

Incidence of taxation for products with inelastic demand (2)

Answer 17

consumers bear most of tax

producers can pass on most of tax in the form of higher price as it will not reduce demand much

Question 18

Incidence of taxation for products with inelastic supply

Answer 18

more tax borne by producers

Question 19

Define neoclassical theory

Answer 19

the assumption that human behaviour is completely rational + utility-maximising

Question 20

Limitations of neoclassical theory (4)

Answer 20

cognitive bias

bounded rationality

bounded self-control

bounded selfishness

Question 21

Features of cognitive bias (4)

Answer 21

rule of thumb - mental shortcuts to help people make quick decisions to a complex choice

anchoring

framing - presenting choices in a way to affect choices made

availability - recalling past examples of similar events to make a decision

Question 22

Features of bounded rationality

Answer 22

idea that consumers are bounded by information + ability and cannot be ideally rational