Question

You receive a $100 cash prize for winning a pie-eating contest. How will you spend the money? Explain your decision-making in terms of behavioral economics, marginal utility, budget constraints, and other economic concepts. (HINT - Define each economic term before applying it) *

Answer 1

Answer:

Behavioural economics: the study of how human behaviour, and the variables that relate to human behaviour, affect economic decisions of groups and individuals.

Marginal utility: the extra satisfaction or benefit obtained from purchasing/consuming an extra unit of a good or service.

Budget constraint: the combinations of goods and services that a person can buy given the person's current income.

Explanation:

If I earned a $100 cash price, the the way I spend this money would be affected by the three concepts above.

Behavioural economics would determine my general dispositions. For example, if I'm a person who is risk-averse, behavioral economics would indicate that I would be unlikely to spend the money on risky goods or services, for example, online bets, or casinos.

Marginal utility would establish which goods and services I would buy depending on the quantities that I already posses, or on the level of utility each unit of them provides. For example, if I have lots of meat in my freezer, I am unlikely to buy more meat, because marginal utility from extra meat will be low.

Finally, my budget constraint will determine my actual spending possibilities. As I have $100, no matter how safe, or how high the marginal utility of a good is, if it costs over $100 dollars, I will not be able to spend the cash price on it.