Test Questions with Answers
Chapter 3. The Subject of Economics II.
Homo Economicus
Chapter 3 ― Question 1
You have a choice of driving or flying from Munich to Paris for a business trip. If you fly, you can work two hours more in Paris, during which you will earn an additional $200. Flying also involves non-monetary benefits of $20. You are a rational utility maximiser and will therefore choose driving if the price differential (flying minus driving) is above
- $200
- $110
- $180
- $220
*D.
Chapter 3 ― Question 2
You buy a new shirt. Is that your independent decision or is it an interactive decision? If interactive, by which other actors is your decision influenced?
* It is to some extent independent, as it is in part determined by the price of the shirt. It is an interactive decision because taste tends to be the result of interaction. Your decision is influenced by trend-setters and fashion designers, by sales people and marketing people, and by your friends and their tastes.
Chapter 3 ― Question 3
Distinguish situations of risk and uncertainty and give an example of each.
* Risk is a situation where possible outcomes and probabilities are known. The weather in next year's summer is an example.
* Uncertainty is a situation where probabilities and sometimes even outcomes are not known. A lottery is an example.
Chapter 3 ― Question 4
Can you describe a situation in your life in which knowing probabilities is important?
* It would be helpful to know which questions are likely to await you in your next exam and which are not.
Chapter 3 ―Question 5
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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