Lesson 1.2.1

1.2.1 Rational decision making Quiz: Pearson Edexcel Economics A, Unit 1

20 questions

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Lesson 1.2.1, Rational decision making: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 1: Theme 1: Introduction to markets and market failure, written with Revision Ninja.

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The 20 questions

  1. Which assumption underlies the economic model of rational decision making for consumers?

    • Consumers always buy the product with the highest price because they associate price with quality.
    • Consumers aim to minimise the number of goods they consume in order to save money each week.
    • Consumers aim to maximise utility from the goods they buy, given their income and prices.
    • Consumers choose goods at random, so their purchases cannot be predicted by changes in price.

  2. Which assumption underlies the model of rational decision making for firms?

    • Firms aim to maximise the number of employees they hire regardless of cost to the business.
    • Firms aim to maximise profit.
    • Firms aim to produce the largest possible output whatever the level of costs incurred.
    • Firms aim to charge the lowest possible price to every customer in every market they serve.

  3. A firm's total revenue is 12000 pounds and its total cost is 9500 pounds. What is its profit?

    • 12000 pounds, which is the total revenue earned from selling the output of the firm.
    • 2500 pounds.
    • 9500 pounds, which is the total cost of production that the firm has to pay.
    • 21500 pounds, which is the sum of total revenue and total cost for the period.

  4. A firm can produce its output at a marginal cost that rises with output. It sells at a constant price. Which output level maximises profit, assuming the firm is a price taker?

    • The output where marginal cost equals the market price.
    • The output where fixed costs are fully covered by revenue from sales in the period.
    • The output where average cost is at its lowest point in the production process.
    • The maximum output that the firm's factory can physically produce in a given year.

  5. Which of the following is a reason why a consumer's decision might not be fully rational in the model?

    • Consumers may lack information or be influenced by habit, so their choices can differ from utility maximisation.
    • Consumers always spend their entire income, so they never choose to save or borrow in the economy.
    • Consumers always know all the prices of goods in every market, so they always choose correctly.
    • Consumers never respond to changes in prices, so their choices are fixed and predictable.

  6. A consumer has a budget of 20 pounds and two goods with prices 4 pounds and 5 pounds. Which decision is consistent with spending the whole budget on a combination of both goods?

    • Buying 3 units of the 5 pound good, which costs 15 pounds and leaves no more money to spend.
    • Buying 2 units of the 4 pound good and 2 units of the 5 pound good, costing 18 pounds in total.
    • Buying 6 units of the 4 pound good, which costs 24 pounds and exceeds the budget.
    • Buying 5 units of the 5 pound good and 1 unit of the 4 pound good, costing 29 pounds in total.

  7. Why might a firm that aims to maximise profit still choose not to maximise sales volume?

    • Producing more units can raise costs or lower price enough that profit falls, so profit and sales volume do not always move together.
    • Firms are legally forbidden from selling large volumes, so they must always restrict their output in every market.
    • Profit is always highest when sales volume is at its absolute maximum for any firm in the market.
    • Selling more units always reduces revenue, so firms with high sales earn less profit in every case.

  8. A firm reduces its price and sells 30 per cent more units, but its total revenue falls. What does this imply about its profit-maximising decision?

    • The firm should stop selling altogether, since any fall in total revenue means the firm earns a loss.
    • The price cut proves the firm has maximised profit, since sales volume has risen sharply in the market.
    • The firm must increase its price further, since total revenue always rises when price falls in any market.
    • The price cut was not profitable, so the firm should consider whether a higher price would raise its total profit.

  9. Evaluate the assumption that consumers aim to maximise utility.

    • It is irrelevant, since consumers never make choices about how to spend their income in the economy.
    • It is worthless, because utility cannot be measured in any form and therefore no model can use it.
    • It is entirely accurate for all consumers, since every purchase is made after full calculation of utility.
    • It is a useful simplification for predicting broad patterns, but evidence of habit and herd behaviour means it can mislead in some cases.

  10. A firm claims it maximises profit by charging a high price on every product. Which evaluation is most accurate?

    • A high price may cut quantity sold so much that profit falls, so the profit-maximising price depends on demand and cost.
    • The claim is correct, because a higher price always raises profit whatever the level of demand for the product.
    • The claim is irrelevant, since profit depends only on the number of workers the firm employs.
    • The claim is wrong, because firms can never profit from charging any price above the cost of production.

  11. Which statement describes the difference between utility and profit as objectives?

    • Utility is a measure of consumer satisfaction, while profit is the difference between a firm's revenue and its costs.
    • Utility and profit are both measured as physical quantities of goods produced in the economy.
    • Utility is the total revenue of a firm, whereas profit is the total wage paid to its workers.
    • Utility and profit are identical concepts, since both describe the same benefit to the same agent.

  12. A consumer buys more of a good when the price falls and less when it rises. Which economic model does this behaviour most directly support?

    • The rational consumer model, in which consumers respond to relative prices to maximise utility.
    • The model of perfectly inelastic supply, in which producers never change output in response to prices.
    • The model of total revenue, in which firms set output to equal the revenue they earn.
    • The model of profit maximisation for firms, in which firms set prices to cover all their costs.

  13. Which of these would be consistent with a firm maximising profit where marginal revenue equals marginal cost?

    • Producing one more unit adds more to cost than to revenue, so the firm should expand output further.
    • Producing one more unit adds exactly the same revenue as it adds to cost, so producing further would not increase profit.
    • Producing one more unit adds revenue but the firm makes no cost change, so the firm should stop producing altogether.
    • Producing one more unit adds less revenue than the cost of that unit, so the firm should expand output.

  14. A firm operates in a market where it can sell any quantity at the same price. Its marginal cost rises with output. Which statement is true?

    • It should produce as little as possible, since higher output always reduces profit when costs rise.
    • It should expand output until marginal cost rises to equal the price, since each extra unit sold then adds nothing more to profit.
    • It should produce the maximum output possible in every period, since extra sales always raise profit.
    • It should set output where average cost is at its minimum, regardless of the price in the market.

  15. Which factor best explains why a consumer might choose a more expensive brand despite a cheaper alternative being available?

    • The consumer believes prices are fixed by the government, so the choice cannot affect the outcome for them.
    • The consumer may value the brand's quality, reputation or habit, so the utility gained exceeds that from the cheaper product.
    • The consumer wants to spend the entire budget, so the more expensive brand is always selected by default.
    • The consumer is unable to compare prices, so the more expensive brand must always be the rational choice.

  16. Which is the best evaluation of the model of rational decision making for explaining real-world buying behaviour?

    • It explains all buying behaviour perfectly, since every purchase is always made after precise calculation of utility.
    • It explains only the behaviour of firms, so it has no bearing on how consumers choose products in shops.
    • It explains nothing useful, because real consumers never respond to price, income or the prices of other goods.
    • It explains broad patterns well, but it may overlook habit, information gaps and social influences, so it needs other models too.

  17. A firm faces a fixed cost of 50000 pounds and a variable cost of 4 pounds per unit. It sells each unit at 10 pounds. How many units must it sell to break even?

    • 8333 units, since 50000 divided by 6 gives the number of units needed to cover fixed costs.
    • 12500 units, since 50000 divided by 4 gives the units needed to cover the variable cost.
    • 20000 units, since 50000 plus 4 times 10 gives the total number of units needed to break even.
    • 5000 units, since 50000 divided by 10 gives the units needed to cover the selling price.

  18. Why does profit maximisation not necessarily mean the firm charges the highest price in the market?

    • Higher prices reduce quantity demanded, so the best price balances price against the quantity sold at each level.
    • Price has no effect on profit, since profit depends only on the number of employees and their wages.
    • Firms always earn the most profit at the highest price, because demand is unaffected by price changes in any market.
    • Firms are legally required to set the lowest price in the market, so they cannot choose their own price.

  19. Which conclusion about firms' objectives is most defensible?

    • Profit maximisation is a legal requirement for firms, so they cannot pursue any other aim in the market.
    • All firms maximise revenue in every case, so profit plays no role in their decisions about price and output.
    • Profit maximisation is a useful assumption for analysing firms, though some may pursue other goals such as sales growth or market share.
    • Firms never aim for profit, since profit is a concept used only for households in the economy.

  20. A consumer repeatedly buys the same brand of coffee out of habit, even when a cheaper brand of similar quality is available. Which alternative view of behaviour does this illustrate?

    • Habitual behaviour, where past choices influence present decisions without full recalculation of utility.
    • Perfect competition, where all coffee brands are identical and the consumer is indifferent between them.
    • Profit maximisation, where the consumer seeks to maximise the revenue earned from buying coffee.
    • Perfect rationality, where the consumer recalculates utility for each purchase using complete information.

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