Rational Decision Making

Question 1

What is involved in all economic behavior?

Answer 1

Decision making by individuals, firms, consumers and government.

Question 2

Neo classical theory

Answer 2

Assumes that economic agents apply rational behavior to each and every decision

Question 3

Rational behavior

Answer 3

Behavior of consumers and producers in order to maximise their benefits

Question 4

Home economics

Answer 4

Used by economists when they are constructing models

Question 5

View explored by behavioral economists

Answer 5

Rational decision making is incorrect as all humans are not rational all the time and they can easily be manipulated (I agree with these economists)

Question 6

Reasons for irrational behavior

Answer 6

1. Need to be valued/herding
2. Habitual behavior/ Inertia
3. Lack of information
4. Weakness in computation (calculation)
5. Default choices
6. Framing and bias

Question 7

Non- price factors

Answer 7

1. Income
2. Price of other goods & (complementary goods?)
3. Changes in population
4. Changes in fashion
5. Changes in legislation (law)
6. Advertising

Question 8

Law of diminishing marginal utility

Answer 8

-Utility: measire of satisfaction we get from purchase
of consuming goods or services.

-Total utility: total satisfaction given the level of
consumption.

-Difference of total ability 2 and total utility 1.

-Marginal utilities: the change in satisfaction from
consuming an extra unit of output.