IB DP Economics: Critique of maximising behaviour (HL)

This study guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 2.4, Critique of the maximizing behaviour of consumers and producers, which is HL only: SL candidates do not study it. Every example in this guide uses invented figures and invented places; none is real data.

Use it with the revision notes and the practice questions. The IB DP Economics hub and the printable checklist show where this fits in the course, and the free diagnostics show what to revise first.

What the guide asks for

The guide places 2.4 inside Unit 2 Microeconomics, which has 70 recommended teaching hours at HL. It sets the depth of teaching at the synthesis and evaluation level (AO3) for all three headings. That means you must be able to weigh strengths against limitations, not only describe. The guide lists no diagram and no calculation for 2.4, so the numbers below are practice for reasoning, not required techniques.

Heading	What you must cover	Status
Rational consumer choice	Assumptions of rationality, utility maximisation and perfect information; limits shown by biases (rule of thumb, anchoring and framing, availability), bounded rationality, bounded self-control, bounded selfishness and imperfect information	HL only
Behavioural economics in action	Choice architecture (default, restricted and mandated choices); nudge theory	HL only
Business objectives	Profit maximisation; alternatives: corporate social responsibility, market share, satisficing, growth	HL only

The rational consumer: the model being criticised

Standard theory assumes three things.

• Rationality: people compare the benefit and cost of each option and choose consistently.
• Utility maximisation: they pick the option giving the most satisfaction (utility) from their limited income.
• Perfect information: they know prices, qualities and consequences.

Worked example. In Veldora (an invented country) a consumer values each extra bike-hire ride in a week at 9, 7, 5, 3 and 1 Veldoran crowns. The fare is 4.

1. Ride 1: 9 is above 4, so ride. Ride 2: 7 is above 4. Ride 3: 5 is above 4. Ride 4: 3 is below 4, so stop.
2. She takes 3 rides.
3. Net benefit = (9 - 4) + (7 - 4) + (5 - 4) = 5 + 3 + 1 = 9 crowns.

She stops where the extra benefit falls below the extra cost. Behavioural economics asks how often real people decide this way.

Biases and rules of thumb

Behavioural economics uses evidence on how people actually decide. Three biases are listed.

Rule of thumb. A mental shortcut that saves effort, such as always buying the middle-priced option. It usually works and sometimes misleads.

Anchoring and framing. Anchoring means a first number seen pulls later judgements towards it. Framing means the same facts feel different when worded differently (“90% of patients survive” against “10% die”).

Worked example. A Veldoran shop marks a lamp “Was 240, now 150”. The headline cut is (240 - 150) / 240 = 37.5%. If the lamp has usually sold for 160, the real saving is 10, which is 10 / 160 = 6.25%. The old price is the anchor and it inflates the felt bargain.

Availability. People judge how likely something is by how easily examples come to mind, so vivid, recent events seem more probable than they are.

Worked example. After a heavily reported warehouse fire in the invented town of Kessin, households think a fire has a 1 in 200 chance each year. The true chance is 1 in 5,000, and the loss would be 30,000. An add-on cover costs 20 a year.

• Perceived expected loss = (1 / 200) x 30,000 = 150, well above 20, so people buy.
• True expected loss = (1 / 5,000) x 30,000 = 6, below 20, so a well-informed risk-neutral buyer would decline.

The bias leads to over-insurance. Notice that this is an error of judgement, not of arithmetic.

Bounded rationality

Herbert Simon argued that people have limited information, time and thinking capacity, so they cannot find the best option. Bounded rationality means decisions are rational only within those limits. People use rules of thumb and accept a “good enough” option. Firms do the same, which links to satisficing later.

Bounded self-control

Bounded self-control describes someone who can name the better long-term option yet fails to follow it, because rewards now outweigh rewards later. Typical cases are under-saving, over-eating and putting off a dental check.

Worked example. A saver is offered 100 now or 120 in 4 weeks, and picks 100 now. She is then offered 100 in 52 weeks or 120 in 56 weeks, and picks 120 in 56 weeks. The waiting time and gain are the same (a 20% gain for 4 extra weeks), yet the choice flips. When the reward is immediate she gives way; when everything is distant she is patient. Rational choice would give the same answer both times.

Bounded selfishness

Bounded selfishness means people care about fairness and others’ welfare, so they do not always maximise their own gain. They give to charity, tip, and punish unfair treatment even at a cost to themselves.

Worked example. In an invented classroom game a proposer splits a pot of 60. The responder can accept, or reject so both get nothing. A purely self-interested responder accepts any offer above zero, so the proposer would offer 1 and keep 59. In the game, responders reject offers below 15. Suppose offering 10 is rejected 80% of the time, and offering 24 is accepted 95% of the time.

• Offer 10: proposer keeps 50, expected payoff = 0.2 x 50 = 10.
• Offer 24: proposer keeps 36, expected payoff = 0.95 x 36 = 34.2.

The proposer who expects others to care about fairness does better by being generous. Fairness changes what maximising means.

Imperfect information

Perfect information is rare. Buyers may not know quality, future prices or hidden terms, and sellers may use this.

Worked example. For a 24-month broadband contract in Veldora, plan P costs 10 a month for 6 months then 38 a month. Plan Q costs 24 a month throughout.

• P: 6 x 10 + 18 x 38 = 60 + 684 = 744.
• Q: 24 x 24 = 576.

A buyer who picks P because “10 a month” is the bigger-looking headline pays 168 more. Imperfect information, a low anchor and limited attention to small print combine here.

Choice architecture and nudges

Choice architecture is the way options are presented: their order, layout, wording and especially the starting option. The guide lists three forms.

Form	Meaning	Example
Default choice	The option that applies unless you act	A tariff that is green unless you opt out
Restricted choice	Only some options are offered	A canteen sells only three set meals
Mandated choice	You are required to make an active choice before going on, with no pre-set option	A form that cannot be submitted until you pick

A nudge steers behaviour predictably without banning options or changing prices much. The idea was popularised by Richard Thaler and Cass Sunstein. The guide also lists consumer nudges in sub-topic 2.7 (HL only), where government policy is studied.

Worked example. A Veldoran electricity company has 20,000 customers. With opt-in to a green tariff, 12% join. With opt-out (green unless you decline), 68% stay.

1. Opt-in members = 0.12 x 20,000 = 2,400.
2. Opt-out members = 0.68 x 20,000 = 13,600.
3. Extra members = 13,600 - 2,400 = 11,200.
4. If the green tariff costs 3 more a month, the extra yearly spend is 11,200 x 3 x 12 = 403,200.

The default works because of inertia and because people read the default as advice. Options remain free, so the nudge is mild, but some critics call it manipulation.

Evaluating nudges

• Strengths: cheap, keep freedom of choice, suit cases where bias harms the chooser.
• Limits: effects can fade, may not fit all groups, give little to people who have genuinely different preferences, and raise questions about who decides what is “better”. Compare with taxes, bans or information campaigns when you judge them.

Business objectives

Standard theory assumes firms maximise profit, where marginal revenue (MR) equals marginal cost (MC). The guide also lists alternatives: corporate social responsibility (CSR), market share, satisficing and growth.

Worked example. A Veldoran firm faces price P = 100 - 2Q and total cost TC = 200 + 20Q.

Q	P	TR	TC	Profit
10	80	800	400	400
20	60	1,200	600	600
25	50	1,250	700	550
30	40	1,200	800	400
37	26	962	940	22
40	20	800	1,000	-200

MR is 100 - 4Q and MC is 20, so MR = MC at Q = 20.

• Profit maximisation: Q = 20, profit 600.
• Growth (revenue as the aim): TR peaks at Q = 25, profit 550.
• Market share: the largest output earning no loss is near Q = 37, profit 22.
• Satisficing: with a target profit of 400, any Q from 10 to 30 will do, because those outputs give at least 400 (solve -2Q² + 80Q - 200 = 400).
• CSR: if the firm spends 100 on a local programme, fixed cost rises to 300 and profit at Q = 20 falls to 500.

Why firms depart from profit maximisation: owners and managers differ (separation of ownership and control), information is limited, and reputation and long-run survival matter.

Common errors

• Describing the bias without saying how it breaks an assumption of the rational model.
• Treating all nudges as good, or all as manipulation, with no judgement.
• Mixing up bounded rationality (limited ability to compute) with bounded self-control (knowing, but not doing).
• Calling a ban, tax or legal requirement a nudge: a nudge leaves every option open and does not change prices much.
• Answering at AO1 only; the guide sets this unit at AO3, so finish with a reasoned judgement.

How it is examined

The guide says HL papers draw on the whole syllabus including HL-only content. Paper 1 (1 hour 15 minutes, 20%) is an extended response paper, Paper 2 (1 hour 45 minutes, 30%) is a data response paper, and Paper 3 (1 hour 45 minutes, 30%) is a policy paper with two compulsory questions. In Paper 3, evaluation is assessed in part (b). Command terms such as “discuss” and “evaluate” ask for a balanced judgement. Advice: support each point with a named bias and a short example.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published February 2020 by the International Baccalaureate Organization. Sub-topic 2.4 (HL only), Unit 2 Microeconomics.