How markets work

• What does utility refer to in economics?

  Satisfaction derived from consuming goods
• How is utility used in economics?

  To quantify subjective preferences and choices
• Is utility directly measurable?

  No, it is a theoretical construct
• What field of economics focuses on utility?

  Microeconomics
• What does marginal utility refer to?

  Additional satisfaction from one more unit
• If Sarah consumes 2 chocolate bars, what is her marginal utility?

  15 units
• What is the total utility when Sarah consumes 3 chocolate bars?

  45 units
• What does the law of diminishing marginal utility state?

  Additional satisfaction decreases with more consumption
• What happens to marginal utility as more pizza slices are consumed?

  It decreases
• How does diminishing marginal utility affect demand?

  It supports a downward sloping demand curve
• Why are consumers willing to pay less for additional units of a good?

  Because of diminishing additional satisfaction
• What is disutility?

  Negative feelings from certain activities
• When is total utility maximized?

  When marginal utility is zero
• What is the marginal utility when consuming 6 slices of pizza?

  1 unit
• What does rational choice theory assume about consumers?

  They behave rationally to maximize satisfaction
• How is utility maximized when multiple products are consumed?

  By equalizing marginal utility per pound spent
• What is the formula for maximizing total utility?

  MUA/PA = MUB/PB
• If product A has a marginal utility of 15 and price of £5, what is MU/Price for A?

  3
• If product B has a marginal utility of 80 and price of £20, what is MU/Price for B?


  4
• What should a consumer do if MU/Price for product B is higher than for product A?

  Allocate more income to product B
• What does traditional economics assume about decision-making?

  People always make rational decisions
• How does behavioral economics differ from traditional economics?

  It recognizes humans can be irrational
• What are cognitive biases in behavioral economics?

  They lead to irrational decision-making
• What social influences does behavioral economics consider?

  Peer pressure and groupthink
• What is a nudge in behavioral economics?

  A technique to change behavior easily
• What is choice architecture?

  Designing the environment to influence decisions
• How can menu design influence decisions?

  By listing items in a specific order
• What is the impact of product placement in stores?

  It can influence sales of products
• How do default options affect decision-making?

  They can influence people's choices significantly
• What are commitment devices?

  Contracts that reinforce healthful behaviors
• What is mandated choice?

  A required decision about participation
• What has dominated standard economic thinking for decades?

  The assumption of rationality
• What is the purpose of the Behavioral Insights Team (BIT)?

  To apply behavioral science to public policy
• What is the key assumption behind rational behavior?

  People make choices to maximize satisfaction
• How does the UK government use text messages in policy?

  To remind people to pay taxes on time
• What do people aim to maximize according to rational choice theory?

  Their own utility or benefit
• What visual cues have been used to reduce littering?

  Images of eyes on garbage cans
• What does rational choice theory suggest about individuals' information?

  Individuals have complete information
• What factors challenge the assumption of rational decision-making?

  Emotional, cognitive, and social factors
• What are some criticisms of behavioral nudges?

  They may produce short-term changes only