Rational decision making 1.2.1

• What is the primary aim of rational consumers when making choices?

  To maximize utility from purchasing and consuming goods and services
• What does the "rational choice model" assume about consumer preferences?

  Consumers choose independently and have fixed, consistent tastes and preferences
• According to the rational choice model, what happens if A is preferred to B and B is preferred to C?

  A is preferred to C
• What type of information do consumers gather according to the rational choice model?

  Complete and perfect information on the alternatives
• What does the rational choice model suggest about consumer decision-making?

  Consumers always make an optimal choice given their preferences
• How has the rational choice model been challenged?

  By the rise of behavioral economics
• What does utility measure in economics?

  The satisfaction from purchasing and consuming a product
• What do most economists assume about economic agents regarding utility?

  They aim to maximize their utility
• What is total utility?

  The total satisfaction from a given level of consumption
• What is marginal utility?

  The change in satisfaction from consuming an extra unit
• What does diminishing marginal utility refer to?

  The marginal utility of extra units declines as more is consumed
• If you buy a second bag of crisps, how does the utility from the second bag compare to the first?

  The utility from the second bag is less than that from the first bag
• According to rational economic theory, what is the maximum price you are willing to pay for a product based on utility?

  It is equal to the marginal utility you get from consuming it
• What are the key assumptions of the rational choice model in economics?

  • Consumers choose independently
  • Fixed and consistent tastes and preferences
  • Complete and perfect information on alternatives
  • Always make optimal choices given preferences
• What are the definitions of total utility, marginal utility, and diminishing marginal utility?

  • Total utility: Total satisfaction from a given level of consumption
  • Marginal utility: Change in satisfaction from consuming an extra unit
  • Diminishing marginal utility: Marginal utility declines as more is consumed