OxfordAQA International AS and A-level Economics: Rational and behavioural choice (9640) – 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.

The questions cover sections 3.3.1.1 and 3.3.1.2 of OxfordAQA’s economics specification (9640, version 1.2). That is extra International A2 content, beyond the International AS. Every person, firm, area and figure is invented and illustrative. See the study guide and revision notes. Other links: course hub, checklist and diagnostics.

Questions

1. A student’s total utility from hours of video gaming in an evening is 0, 30, 52, 66, 72, 72 and 66 for 0 to 6 hours.

(a) Calculate the marginal utility of each hour from 1 to 6. [2] (b) If gaming were free, state how many hours a utility maximiser would play and explain why. [2]

2. A commuter would pay 5, 4, 3 and 2 currency units for her first, second, third and fourth pastry of the day.

(a) How many pastries does she buy at a price of 3.50, and at 2.50? [2] (b) Use diminishing marginal utility to explain why her demand curve slopes downward. [2]

3. Mobile plan A charges 15 a month plus 0.05 a minute. Plan B charges 5 a month plus 0.09 a minute.

(a) Calculate the monthly cost of each plan for 180 minutes of calls. [2] (b) Calculate the number of minutes at which the two plans cost the same. [2] (c) Explain how this shows that imperfect information can prevent a rational choice. [2]

4. An insurer sells health cover to 400 people, 200 low-risk with an expected claim of 50 a year and 200 high-risk with an expected claim of 350. It cannot tell them apart. Low-risk people value cover at no more than 80.

(a) Calculate the premium at which the insurer breaks even if all 400 buy. [2] (b) Show what happens if the low-risk people leave at that premium. [2] (c) Explain why this is market failure. [2]

5. Explain the difference between bounded rationality and bounded self-control, illustrating each with a brief case. [4]

6. A borrower takes 2,000 at 1.5% a month, compounding, to be repaid in one payment after 12 months. She believes the cost is 18% of the loan.

(a) Calculate the amount she repays. [2] (b) Calculate how much she has underestimated the amount to repay. [2] (c) Name the type of bias shown. [1]

7. Name the bias in each case and explain it.

(i) A shopper sees a watch priced at 900, then one priced at 450, and treats the second as a bargain without comparing other shops. [2] (ii) A household has used the same broadband supplier for eight years and has never compared rivals. [2] (iii) A student buys a reusable bottle because all her friends have one. [2]

8. A firm has 600 staff. With opt-in enrolment to a savings plan, 30% join. With opt-out enrolment, 75% stay in. Each member saves 50 a month.

(a) Calculate the extra members and the extra annual saving under opt-out. [3] (b) Explain why the default matters, and why traditional theory would not predict it. [3]

9. (a) Explain how altruism and concern for fairness challenge the assumption of self-interested behaviour. [3] (b) A hardware shop sells 200 snow shovels a day at 15. After heavy snow it could sell 300 at 15 and still sells 300 at 24. Customers see this as unfair, and for 5 days 30% of its regular daily sales are lost. Calculate the extra revenue from the high price on the snow day and the revenue lost over the 5 days, and state what this implies. [3]

10. A council writes to 12,000 households with a message that most neighbours pay on time. On-time payment rises from 80% to 85%. Each letter costs 0.40.

(a) Calculate the number of extra households paying on time and the cost per extra payer. [3] (b) Evaluate whether this nudge is better than a fine. [6]

11. Assess whether behavioural economics makes the traditional model of the rational decision maker redundant. [8]

Answers

1. (a) MU = 30, 22, 14 [1] and 6, 0, -6 [1]. [2] (b) TU is highest (72) at 4 or 5 hours [1]. The fifth hour adds nothing (MU is zero) and the sixth lowers utility, so a utility maximiser stops at 4 or 5 hours [1]. [2] Examiner insight: Link the quantity to MU reaching zero, not just to the biggest number.

2. (a) At 3.50 she buys 2 pastries, since the third is worth only 3 [1]. At 2.50 she buys 3, since the third (3) is at least the price and the fourth (2) is not [1]. [2] (b) Diminishing marginal utility: each extra pastry is worth less to her [1]. She takes more only if the price falls, so the quantity demanded rises as price falls, giving a downward-sloping demand curve [1]. [2] Examiner insight: Connect the falling value of each unit to the price needed to buy it.

3. (a) A: 15 + 0.05 × 180 = 24 [1]. B: 5 + 0.09 × 180 = 21.2 [1]. [2] (b) Set 15 + 0.05m = 5 + 0.09m [1]. Then 10 = 0.04m, so m = 250 minutes [1]. [2] (c) A has the lower rate per minute, so a buyer who compares only that picks A, yet B is cheaper at 180 minutes [1]. Information that is incomplete or hard to use leads to a costlier choice, so the choice is not rational [1]. [2] Examiner insight: Use the figures in part (c). A general statement about information gains less than showing the wrong choice and its cost.

4. (a) Total expected claims 200 × 50 + 200 × 350 = 80,000 [1]. Divided by 400 gives 200 each [1]. [2] (b) Low-risk people value cover at no more than 80, so at 200 they leave [1]. Left: 200 × 200 = 40,000 premiums against 200 × 350 = 70,000 claims, a loss of 30,000 [1]. [2] (c) The insurer cannot tell the groups apart because buyers know more about their risk (asymmetric information) [1]. Low-risk people would buy at a fair price of 50 and the insurer would sell, but this trade does not happen, so resources are misallocated [1]. [2] Examiner insight: State who knows more and who loses. Market failure is shown by trades that would benefit both sides not taking place.

5. Bounded rationality: people have limited information, time and ability to process it, so they cannot always make the best choice [1]. Example: choosing a phone plan by one headline price [1]. Bounded self-control: people know what is best for them but fail to act on it, giving too much weight to the present [1]. Example: planning to save but spending the money [1]. [4] Examiner insight: Keep the two apart: ability to decide versus following through.

6. (a) 2,000 × 1.015¹² [1] = 2,391.24 [1]. [2] (b) She believes 18% × 2,000 = 360, so 2,360 [1]. She underestimates by 2,391.24 - 2,360 = 31.24 [1]. [2] (c) A computational problem (compound interest treated as simple) [1]. [1] Examiner insight: Show the multiplier, then the belief it is compared with.

7. (i) Anchoring [1]: the first price (900) becomes the reference point that makes 450 look cheap [1]. [2] (ii) Inertia [1]: she stays with the current supplier because changing takes effort, even if rivals cost less [1]. [2] (iii) Social norm [1]: she copies what people around her do, following an unwritten rule [1]. [2] Examiner insight: A label alone is not enough. Say how the case’s detail produces the behaviour.

8. (a) Opt-in: 0.30 × 600 = 180; opt-out: 0.75 × 600 = 450 [1]. Extra members 270 [1]. Extra saving 270 × 50 × 12 = 162,000 a year [1]. [3] (b) Inertia: most people stay with whatever the default is [1]. Choosing is costly, so the default carries the decision [1]. Traditional theory assumes rational people would pick the same outcome whichever way the options are presented, so take-up should not change [1]. [3] Examiner insight: Stress that the options are identical but behaviour differs.

9. (a) Altruism: some people give to others with no personal return, as when donating to charity [1]. Fairness: people may refuse a deal they see as unfair even when it benefits them [1]. A model of narrow self-interest cannot predict this, so behaviour must reflect others’ wellbeing and fairness too [1]. [3] (b) Extra revenue on the snow day: 300 × 24 - 300 × 15 = 7,200 - 4,500 = 2,700 [1]. Lost sales: 30% of 200 = 60 a day, so 140 sold, revenue 2,100 against 3,000, a loss of 900 a day, 4,500 over 5 days [1]. The loss exceeds the gain by 1,800, so a price rise seen as unfair may reduce profit [1]. [3] Examiner insight: Give the comparison and say what it means. Numbers without a conclusion on the firm’s decision leave the point unfinished.

10. (a) 0.80 × 12,000 = 9,600; 0.85 × 12,000 = 10,200 [1]. Extra payers 600 [1]. Letters cost 0.40 × 12,000 = 4,800, so 4,800 ÷ 600 = 8 per extra payer [1]. [3] (b) For: the cost per extra payer is low [1]. It keeps choice and avoids penalising anyone [1]. Against: the gain is 5 percentage points and the effect may fade [1]. A fine may be needed if the problem is large or the cost of non-payment high [1]. Weighing: judgement depends on the cost per extra payer against the cost of enforcing a fine [1]. A supported conclusion, such as trying the nudge first and adding a fine for persistent non-payers [1]. [6] Examiner insight: Evaluation gains credit when each point is explained and the answer ends in a judgement that follows from them.

11. Traditional theory gives clear predictions, such as diminishing marginal utility supporting a downward-sloping demand curve [1]. It still works well for repeated, high-stakes decisions where people learn and have good information [1]. Behavioural evidence shows systematic departures: bounded rationality, inertia, anchoring and rules of thumb [1]. It explains cases that the rational model cannot, such as take-up changing with the default [1]. Altruism and fairness can be added as sources of utility, so the model is extended and not discarded [1]. Behavioural findings sit on the rational model: biases are defined as departures from it [1]. The balance depends on context: for small, quick or complex choices behavioural insights matter more [1]. Judgement: the rational model is not redundant, but it is incomplete, so use it as a benchmark and behavioural economics as a correction [1]. [8] Examiner insight: A one-sided answer rarely reaches full credit. Use examples from both sides and state which carries more weight and why.

Where marks are usually lost

• Writing total utility when marginal utility is asked for.
• Calling diminishing marginal utility certain, not a hypothesis.
• Mixing up bounded rationality and bounded self-control.
• Naming a bias with no link to the case.
• Missing who knows more in an asymmetric information answer.
• Quoting figures without saying what they imply.
• Treating a nudge as a ban or a tax.
• Listing points in an evaluation with no judgement at the end.

Next steps

• Revisit the revision notes and the study guide.
• Return to the OxfordAQA Economics hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Source: the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, Oxford International AQA Examinations. Sections 3.3.1.1 and 3.3.1.2.