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1 Workbook Micro (nd Year) Name:... Other Information:... This workbook is the third of the four workbooks I have written and designed to help you prepare for AS and A Level exams. Good Luck!

2 Content Chapter Topic Page No 1. Marginal Utility and Consumer Behaviour 7. Behavioural Economics 8 1. Production, Costs and Revenue 1 5. Perfect Competition 0 5. Monopoly 1 7. Monopolistic Competition Oligopolistic Competition Price Discrimination 0 9. The Theory of Contestable markets 5 8. The Technological Evolution and Economics The Labour Markets: Demand and Supply Wage Determination in Labour Markets Distribution of Income and Wealth Market Failure and Government Intervention 90 7 Homework planner 8

3 Chapter 1 Marginal Utility and Consumer Behaviour Explain the keywords with examples: Scarcity/Rarity: Margin: Utility: Total utility (TU): Marginal utility (MU): Rational Behaviour: Measuring Utility: Reveal preference theory: Asymmetric information: In Table 1 we contrast utility graph of a Teetotaller and an Alcoholic you need to work out the marginal utility for each individual. Table 1 Teetotaller Can of coke Total Utility 0 Alcoholic Marginal Utility Whisky Total Utility Marginal Utility Falls flat

4 Plot the Total & Marginal Utility curves for the Teetotaller and the Alcoholic on Grid 1 and briefly comment about the MU and the TU curves (Point of Satiation) of both Teetotaller and Alcoholic (what happens when MU = 0) Grid 1 Using the example of Teetotaller - explain utility maximisation. Using the example of Teetotaller, explain the law of diminishing marginal utility.

5 5 To understand the relationship between Price, Marginal Utility and Individual s demand curve, and why consumers switch between different products. Activity: Calculate the Marginal Utility (MU) in Table and plot the Total Utility (TU) and the Marginal Utility (MU) curve on Grid provided. Units of Utility table for Good A Quan Total Marginal tity Utility Utility of (units) good s Table Grid The individual s marginal utility of money is 1= units of utility and it is constant. What is the maximum quantity of the goods that the individual will buy when it is price at? The individual has in their pocket. Calculate the money that would not be spent by the individual and advise them as to what they should be doing with the remaining money to maximise their utility.

6 Explain the barriers in utility maximization: Time and information: Budget constraints: Market prices: Limited Earnings: Homework Q.1 Briefly describe the role of information in decision making between buyers and sellers (Hint: Market failure, Symmetric, Asymmetric). Multiple choice question Q. The diagram shows the marginal utility that an individual derives from a good at different levels of consumption. Utility units MU Qty The utility he derives from the last he spends on every unit of good is units. Assuming the marginal utility of money is constant, what quantity of goods will he purchase if the price of the good is? A 1 B 1 C D

7 7 Homework Q.. Using examples and a diagram (figure 1.1), explain the hypothesis of diminishing Marginal Utility. (9 marks) Figure 1. Multiple choice question Q.. Traditional economics states that a rational consumer in the best interest of the society will always attempt to: A. act in self interest and maximise their total utility B. postpone consumption for future consumption C. consume all their income on a basket of goods D. minimise their Marginal Utility Q.5. Total Utility derived by a consumer of a Good A at different levels of consumption is provided below. The consumer obtains units of utility from the last they spend on each good purchased. Units of Good A consumed Total Utility (units) Marginal Utility (Calculate) What is the number of units of Good A they will consume if the price of Good A is and the Marginal Utility of money is constant. A. units B. 5 units C. units D. 7 units

8 8 Behavioural Economics Chapter Explain keywords with examples: Behavioural economics: Behavioural Insight Team (BIT): Rule of thumb: Bounded rationality: Bounded self-control: Satisficing: Thinking fast (Automatic pilot) and Thinking slow (Being careful): Cognitive bias: Confirmation bias: Availability bias: Anchoring: Social norms: Economic sanctions: Nudges:

9 9 Shoves: Altruism: Fairness: Choice architecture: Default choice: Mandated choice: Framing: Restricted choice: Homework Multiple Choice Questions Q.1. A study undertaken in an advanced economy found that simply increasing the income of a pensioner by 50 will increase their spending on fuel by 5. However, if the increase is labelled the Winter Fuel Allowance then 0 will be spent on fuel. What can be concluded from this finding? A. People act in their best self interest B. There are many rich pensioners who should not be given fuel allowance C. People s behaviour does not conform to traditional view of rational behaviour D. The Winter Fuel Allowance is confusing Q.. The more modern behavioural economics is different from traditional economic theory as behavioural economic models assume that A. People act in best self interest B. Consumers always try and maximise Total Utility C. People are well informed and will consider all available options when making choices. D. People are emotional beings, and emotional factors influence their economic decision-making.

10 Homework Q.. Traditional economic theory assumes that the consumers make rational decisions that maximise their economic welfare, but behavioural economists disagree with it and say that the individuals are not capable of making decisions that will maximise their welfare. Using examples to illustrate your answer, explain how government can use choice architecture to achieve the desired outcome. [15 marks] Multiple Choice Question Q.. The behavioural economics model suggest that the UK government should consider people s ability to make complex financial decisions, i.e. when choosing between pension schemes in the open market, social welfare is likely to increase if people are A Given a choice of all pension options available in the market B Given a choice of a limited set of pre-selected options C Given as much information as possible for each available option. D Not given any choice.

11 11 Homework Q.5. Illiberal and patronising in my view, nanny statism at its worst reaction from Conservative MP Will Quince who strongly feels the tax on sugar drinks imposed by the Chancellor George Osborne in his budget of 01 would be passed directly to the consumers by the firms. Using your knowledge of both traditional economic theory and the more modern behavioural economics, assess alternative policies that the UK Government could use to encourage UK citizens to lead healthy lifestyles. (5 marks)