Fig. 1 shows information used by a college student choosing between three new mobile-data contracts. The student has a fixed monthly budget of £20. An econo...
Question 1 Report
Fig. 1 shows information used by a college student choosing between three new mobile-data contracts. The student has a fixed monthly budget of £20. An economic model may assume that the student compares the price, data quantity and expected usefulness of each contract before choosing. The mobile-phone market is competitive, but advertising, friends and incomplete information may affect actual demand. The figures in the boxes are estimates produced by a comparison website.
(a) Which one of the following contracts would a rational consumer be predicted to choose? Give a reason using Fig. 1. [1]
(b) Define rational economic behaviour in the context of this student’s choice. [2]
(c) Explain why the student’s actual choice may not match the prediction of the economic model. [3]
(d) What does the assumption ceteris paribus mean when a firm investigates the effect of a lower contract price on demand? [2]
Answer Details
(a) Plan B is predicted to be chosen because it gives the highest estimated utility, 83, while costing £18, which is within the £20 monthly budget. [1]
(b) Rational economic behaviour means comparing the available contracts and choosing the one expected to maximise satisfaction, or utility, subject to the student's budget. [2]
(c) Actual choice may differ because the utility estimates may be inaccurate; the student may not have full information about coverage or hidden costs; and friends, advertising or brand loyalty may influence the decision. An impulsive decision rather than a calculated comparison could also lead to a different choice. [3]
(d) Ceteris paribus means holding other factors affecting demand unchanged, so that the effect of the lower price alone can be identified. [2]
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