Critique of the maximizing behaviour of consumers and producers practice questions.

Which of the following best describes bounded rationality?

• Consumers deliberately ignore information in order to benefit other people
• Consumers lack the information, time and ability to evaluate all options, so they satisfice
• Consumers always calculate the utility-maximizing option before every purchase
• Consumers give in to temptation even when they know a choice harms their long-term interests

Answer: Consumers lack the information, time and ability to evaluate all options, so they satisfice

Bounded rationality (Herbert Simon) states that limited information, time and cognitive capacity prevent full optimization, so decision-makers satisfice rather than maximize. Giving in to temptation describes bounded self-control instead.

A retailer displays a jacket with the label "Was $220 — now only $95". Many shoppers judge $95 to be a bargain because they compare it with the first price shown. Which cognitive bias is the retailer exploiting?

• Availability bias
• Framing bias
• Anchoring
• Rule of thumb

Answer: Anchoring

Anchoring occurs when consumers rely too heavily on an initial piece of information (the $220 "anchor") when evaluating a later value. The judgement of $95 is distorted by the reference price.

A yoghurt brand advertises its product as "90% fat free" rather than "contains 10% fat", and sales increase. This outcome best illustrates

• framing
• anchoring
• availability bias
• bounded self-control

Answer: framing

Framing means the way identical information is presented alters consumer decisions. "90% fat free" and "10% fat" describe the same product, yet the positive frame changes behaviour.

After weeks of intense news coverage of a rare airline accident, many travellers switch to long car journeys because they now overestimate the risk of flying. This behaviour is best explained by

• the anchoring effect
• the framing effect
• the availability bias
• bounded selfishness

Answer: the availability bias

Availability bias leads people to judge the probability of an event by how easily examples come to mind. Vivid, recent media coverage makes plane crashes feel more likely than they actually are.

Employees are automatically enrolled in a workplace pension scheme unless they actively opt out, and participation rates rise sharply. Which type of choice architecture is being used?

• Mandated choice
• Default choice
• Restricted choice
• Anchoring

Answer: Default choice

With default choice, one option is pre-selected and applies unless the individual opts out. Because people tend to stick with defaults, enrolment rises without removing freedom of choice.

A school cafeteria places fruit at eye level and moves desserts to a shelf that is harder to reach, without changing any prices or banning any product. This intervention is best described as

• an indirect tax
• mandated choice
• a nudge
• a subsidy to fruit producers

Answer: a nudge

A nudge alters the choice environment to steer behaviour in a predictable way without forbidding options or significantly changing economic incentives. Rearranging product placement is a classic example.