Questions for Review with Answers
Chapter 3. The Subject of Economics II. Homo Economicus
I. Three Decision Models
Chapter 3 – Question 1
What is typical of the individual decisions of homo economicus?
* Homo economicus and the perfectly competitive firm take their decisions independently. They are not influenced by other consumers or other firms.
Chapter 3 – Question 2
What is game theory about?
* It investigates the behaviour of big corporations which between them more or less control an industry. Their behaviour is supposed to be strategic, which means that responses of competitors to the decision considered by a firm are taken into account.
Chapter 3 – Question 3
What does public choice theory analyse?
* It analyses the decisions of governments for the people and on behalf of the people.
II. Human Nature
Chapter 3 – Question 4
What do economists mean by rationality?
* Rationality means that man is able to make a cost-benefit analysis, that he is not prone to systematic mistake, and that he is able to choose adequate means to achieve his ends, which are not necessarily rational.
Chapter 3 – Question 5
Distinguish situations of risk and uncertainty and give an example of each.
* In a situation of risk, possible outcomes and their probabilities are known. In a situation of uncertainty, probabilities and perhaps even outcomes are unknown.
An example of risk is next summer's weather. An example of uncertainty is a lottery.
Chapter 3 – Question 6
What is the invisible hand?
* It is a God-given defect which makes us equate betterment with financial and material betterment.
Chapter 3 – Question 7
Do you remember the famous dog-quote?
* "Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog."
III. The Human Condition
Chapter 3 – Question 8
Why are human needs supposed to be insatiable?
* Because, as soon as one need has been satisfied, a new one emerges.
IV. Man's Social Role
Chapter 3 – Question 9
List the four characteristics of man's social role.
* He is a lonesome fighter, an unknowing altruist (because the pursuit of his own interest contributes to the public wealth), the owner of a factor of production and a commodity on the factor market.
V. Homo Economicus and Economics
Chapter 3 – Question 10
Explain what non-hedonistic, revealed-preferences utilitarianism is.
* Non-hedonistic revealed-preferences utilitarianism is the scientific basis of the homo economicus model. Utilitarianism because the model and much of microeconomic theory centres around utility. Non-hedonistic because, unlike earlier versions of utilitarianism, it does not equate utility with pleasure and happiness. Instead, the theory states that man has preferences - he likes one option more than another - and that these preferences are revealed by what he buys or does.
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