AQA A-level Economics: Rational choice, information problems and nudges (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-section Individual economic decision making (3.1.2 on the AQA website, 4.1.2 in the combined PDF). Prepare with the study guide and revision notes. The course hub is AQA A-level Economics and the printable checklist tracks progress. All countries, firms and figures are invented.

Questions

1. (a) Define marginal utility. [1] (b) State the hypothesis of diminishing marginal utility. [1] (c) State what is true of total utility when marginal utility is zero. [1]

2. A consumer’s total utility from cakes at a cafe, measured in pence she would pay, is 90, 160, 210, 240, 250 and 250 for 1 to 6 cakes.

(a) Calculate the marginal utility of each cake. [2] (b) The price is 40p. How many cakes does a rational consumer buy? Explain. [2] (c) The price falls to 20p. How many does she buy? [1] (d) Explain how your answers support a downward-sloping demand curve. [3]

3. A gym owner has paid 2,000 rent this month. Each extra opening hour costs 30 in staff and energy. The extra revenue from hours 1 to 5 is 60, 50, 40, 25 and 10.

(a) How many extra hours should she open? [2] (b) Calculate the extra profit. [1] (c) Explain why the rent does not affect the decision. [1]

4. In Country D, one in four second-hand laptops is good and three in four are poor. Buyers cannot tell them apart. A buyer values a good one at 800 and a poor one at 400. Owners of good ones accept at least 650; owners of poor ones at least 300.

(a) Calculate the most a buyer will rationally pay for a laptop chosen at random. [2] (b) Explain what happens to the market at that price. [2] (c) Suggest one way to reduce the problem and explain it. [2]

5. A vitamin drink costs 8 a bottle, which equals marginal cost. Consumers believe the marginal benefit of bottles 1 to 6 is 21, 18, 15, 12, 9 and 6. The true marginal benefit is 6 lower in each case.

(a) How many bottles do consumers buy? [1] (b) How many bottles are efficient? [1] (c) Calculate the welfare loss. [2] (d) Explain the role of imperfect information. [2]

6. Distinguish between bounded rationality and bounded self-control, giving an example of each. [4]

7. Name the bias in each case.

(a) A traveller cancels a trip after seeing news of one air accident. (b) A shopper sees “was 240, now 168” and thinks it is a bargain. (c) A householder cuts water use after seeing the neighbours’ bills. [3] (d) Calculate the percentage saving in (b). [1] (e) Explain how a retailer might use anchoring to raise sales. [2]

8. In an ultimatum game, a proposer splits 50. The responder may accept, or reject so that both get nothing. The proposer offers 5.

(a) Calculate the offer as a percentage of 50. [1] (b) State the payoffs if the offer is accepted and if rejected. [1] (c) State what a purely self-interested responder would do. [1] (d) Explain what a rejection suggests about the responder’s utility. [2]

9. A firm with 1,200 staff offers a free health check. Under opt-in, 25% attend; under opt-out booking, 70% attend.

(a) Calculate the number attending in each case. [2] (b) Each check costs 30. Calculate the extra cost of the opt-out design. [2] (c) Explain why the default raises attendance. [2]

10. Distinguish between default choice, restricted choice and mandated choice, with an example of each. [6]

11. Country E wants to cut consumption of sugary drinks. One option is a tax raising the price by 8%; price elasticity of demand is -0.5. The other is a nudge: smaller default cup sizes and healthy options displayed first. Evaluate which is better. [9]

Answers

1. (a) The extra satisfaction from consuming one more unit [1]. (b) As more is consumed in a given time, each extra unit adds less utility than the previous one [1]. (c) Total utility is at its maximum, no longer rising [1]. [3] Examiner insight: “Extra” or “additional” is what separates marginal from total; a definition that mentions only “satisfaction” is incomplete.

2. (a) MU is the change in TU: 90, 70, 50, 30, 10, 0 [1] for method, [1] for all six correct. (b) She buys while MU is at least the price: the third cake adds 50 and the fourth 30, so 3 cakes [1], because the fourth is worth less than she would pay [1]. (c) 4 cakes [1]. (d) Price fell from 40p to 20p and quantity rose from 3 to 4 [1]. Each extra cake is worth less to her [1], so she buys more only if the price is lower, which gives a downward-sloping demand curve [1]. [8] Examiner insight: Link the table to demand explicitly; quoting the numbers without saying that falling marginal utility requires a lower price leaves the explanation incomplete.

3. (a) Open while extra revenue exceeds 30: hours 1 to 3 (60, 50, 40); hour 4 gives 25, which is below 30 [1]. So 3 hours [1]. (b) (60 - 30) + (50 - 30) + (40 - 30) = 30 + 20 + 10 = 60 [1]. (c) Rent is a sunk cost: it is paid whatever she decides, so it is not part of marginal cost [1]. [4] Examiner insight: Compare marginal revenue with marginal cost hour by hour; a total profit figure with no unit-by-unit comparison does not show the margin.

4. (a) 0.25 x 800 + 0.75 x 400 = 200 + 300 = 500 [1] for method, [1] for the answer. (b) Owners of good laptops want at least 650, more than 500, so they withdraw [1]. Only poor laptops remain, buyers value them at 400, and the price falls [1]. (c) A warranty or independent inspection [1] lets buyers trust quality, so good laptops can sell at a higher price [1]. [6] Examiner insight: Use the figures given. A remedy needs an explanation of how it reduces the information gap, not just its name.

5. (a) Bought while perceived MB exceeds 8: 21, 18, 15, 12, 9 all do, 6 does not, so 5 bottles [1]. (b) True MB is 15, 12, 9, 6, 3, 0; only the first three exceed 8, so 3 bottles [1]. (c) Over-consumed bottles 4 and 5: (8 - 6) + (8 - 3) = 2 + 5 = 7 [1] for method, [1] for the answer. (d) Consumers overestimate the benefit [1], so they buy where true marginal benefit is below price, more than is efficient [1]. [6] Examiner insight: State the gap between price and true MB unit by unit; using perceived MB for the loss is the common slip.

6. Bounded rationality: a decision maker’s information, time and thinking capacity are limited, so the best option cannot always be identified [1], for example booking the first acceptable hotel found without comparing the rest [1]. Bounded self-control: someone knows what is best in the long run but does not act on it because the present weighs too heavily [1], for example skipping a planned exercise class for a film tonight [1]. [4] Examiner insight: Each half needs a definition and an example that fits it; an example of saving under bounded rationality shows that the two ideas are confused.

7. (a) Availability [1]. (b) Anchoring [1]. (c) Social norms [1]. (d) (240 - 168) / 240 = 72 / 240 = 30% [1]. (e) The high original price is the anchor, so 168 seems low in comparison [1], which makes consumers more likely to buy than if 168 were shown alone [1]. [6] Examiner insight: Naming the bias is only the first step; apply it by identifying the anchor as the 240 in the scenario.

8. (a) 5 / 50 x 100 = 10% [1]. (b) Accepted: proposer 45, responder 5. Rejected: both 0 [1]. (c) Accept, since 5 is more than 0 [1]. (d) Rejecting gives up 5 to punish an unfair split [1], so utility depends on fairness as well as own income, which challenges the assumption of pure self-interest [1]. [5] Examiner insight: Say what the responder gives up; “he is angry” without linking it to utility and fairness does not explain.

9. (a) Opt-in: 0.25 x 1,200 = 300. Opt-out: 0.70 x 1,200 = 840 [2]. (b) Extra attendees 840 - 300 = 540 [1]; 540 x 30 = 16,200 [1]. (c) Most people stick with the default through inertia, so few act to leave it [1]. The default also helps those whose self-control is bounded, as no action is needed to take part [1]. [6] Examiner insight: Work out the extra, not the total, in (b); the question asks about the difference between designs.

10. Default choice: the option that applies unless the person acts [1], such as automatic enrolment in a pension with the right to leave [1]. Restricted choice: the range of options is limited [1], such as a canteen offering only healthy desserts [1]. Mandated choice: people must make an active decision [1], such as having to answer yes or no about organ donation when applying for a licence [1]. [6] Examiner insight: The three terms are easy to blur, so make the distinction explicit: who must act, and what happens if they do nothing.

11. Tax: price +8% with PED -0.5 gives -0.5 x 8 = -4% in quantity [1]. A nudge is low cost, keeps freedom to choose and may reach people who ignore price [1], and it works by exploiting inertia and framing [1]. But its effect is uncertain and may be small or fade [1]; the tax’s 4% fall is predictable [1]. The tax raises revenue but hits low-income households and may be unpopular [1]. Nudges avoid this but may be weak where the externality is large [1]. A judgement is needed: nudge first if evidence shows an effect above 4% at low cost [1], and the tax if a reliable, larger reduction is needed, perhaps with both together, since they work differently [1]. [9] Examiner insight: Evaluation gains credit when it weighs the options against each other and reaches a conclusion that depends on stated conditions, not when it lists strengths and limits separately.

Where marks are usually lost

• Leaving out the word “extra” in the definition of marginal utility.
• Stating demand slopes downward without linking it to falling marginal utility.
• Letting sunk costs enter a marginal decision.
• Using the average price rather than expected value when information is hidden.
• Describing asymmetric information without saying which party knows more.
• Naming a bias without applying it to the scenario.
• Using perceived rather than true marginal benefit for welfare loss.
• Mixing up default, restricted and mandated choice.
• Ending an evaluation with a repeat of the points, rather than a justified judgement.

Next steps

• Recap with the revision notes or the study guide.
• Go to the AQA A-level Economics hub and the checklist.
• Take all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA: the A-level sub-section Individual economic decision making, 3.1.2 on the AQA website (4.1.2 in the combined PDF).