topic 2:20 - behavioural economics

Question 1

assumption of consumer rationality

Answer 1

assumption that consumers make purchasing decisions according to their tastes and preferences which satisfy the following 3 assumptions of
1. completeness assumption
2. transivity assumption
3. non-satiation assumption

Question 1

assumptions of consumer behaviour

Answer 1

1. consumer rationality
2. perfect information
3. utility maximisation

Question 2

assumption of perfect information

Answer 2

consumers have perfect information of all the alternatives available such that there is no uncertainty and full knowledge of the possibly products, product qualities and prices.

Question 3

assumption of utility maximisation

Answer 3

theory states that consumers maximise their utility by buying the combination of g&s that results in the greatest amount of utility for the given amount of money spent

Question 4

utility

Answer 4

is the satisfaction that consumers derive from consuming a good

Question 5

bias

Answer 5

is a term in psychology which refers to systemic errors in thinking of evaluating that are departures from normal standards of though of judgement.

Question 6

types of biases (4)

Answer 6

1. rule of thumb
2. anchoring
3. framing
4. availability

Question 7

rules of thumb

Answer 7

simple guidelines based on experience and common sense which simplifies complicated decisions. people often rely on simple rules to make decisions.

Question 8

anchoring

Answer 8

rbias which involves the use of irrelevant information to make decisions as this information may be the first piece of information that a consumer comes across.

Question 9

framing

Answer 9

bias that relates to how choices are presented to decision-makers. people make decisions bassed on how these choices are framed to them.

e.g. 80% lean better than 20% fat and vintage better than old clothes

Question 10

bounded rationality

Answer 10

1. argues that people do not have an unlimited capacity to process information and searching for that information needed to maximise utility in itself a costly process.
2. idea that consumers are only rational within limits, as it is limited by consumers’ insufficient information, the costliness of obtaining information and limitations of the humand mind to process usch information leads to a case where instead of maximising, consumers satisfice.

Question 10

framing

Answer 10

bias which refers to people making decision based on information that is most recently available, although there is no reason to expect that this information is any more reliable than any other information that was presented earlier. this is partly due to the fact that people tend to remember information that was presented earlier rather than earlier.

Question 10

availability

Answer 10

bias which refers to people making decisions based on information that is most recently available, although there is no reason to expect that this information is more reliable than any other information that was presented earlier. this is partly due to the fact that people tend to remember information that was presented earlier, rather than earlier.

Question 10

effects of limitations of assumptions of behavioural economics

Answer 10

1. bounded rationality
2. bounded self-control
3. bounded selfishness
4. imperfect information

Question 10

bounded self-control

Answer 10

Refers to the idea that people exercise self-control only within limits, which
means that they do not possess the self control to make rational decisions
and act in ways that are inconsistent with the assumption of rational behavior.

Question 11

satisfice

Answer 11

meaning seeking a satisfactory outcome rather than the optimal one.

Question 12

bounded selfishness

Answer 12

Idea that people are only selfish within limits, and the assumption of self-
interested behavior underlying the maximisation principle cannot explain the numerous accounts of selfless behavior and willingness to contribute to the
public good even at the expense of personal welfare

Question 13

imperfect information

Answer 13

Reality that consumers make non-optimal decisions based on the lack of
access to complete information, and therefore they are unable to maximise
utility as they make decisions on faulty and incomplete information