Rational decision making and behavioural economics Theme 1

Answer

B

Mark scheme

Notes from the mark scheme and report

• cancelling when the price rises is rational utility maximisation (B)
• A firms maximise profit, not consumers
• C and D are irrational behaviour

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question is one that has been used regularly and really tested the understanding of the newer additions to the specification in 2015 of rational and irrational behaviour. The rational element of consumers understanding the negative impacts of such consumption upon the environment were understood well by the majority of candidates, and therefore the vast majority of answers were structured well in terms of one-sided arguments. Understanding why irrational was more difficult for candidates to explain, focusing on perhaps the price being particularly more expensive. In addition, many candidates were again looking to conclude these questions, with a final judgement which is not required or awardable which is a real shame for the candidates in question.

Notes from the mark scheme and report

• rational: utility from health, lower emissions (7.2 kg vs 3.8 kg CO2 per day), long-run savings
• irrational: herd behaviour, paying much higher prices, habit
• report: the irrational side was harder to explain and a final judgement is not required

Mark scheme, including the levels grid and indicative content

Examiner's comment

Question 6 (b) This question was a ten-mark question based on irrational behaviour associated with the purchase of plastic carrier bags. The use of the case study/ extracts was excellent in this answer, however the question was not well evaluated with students not consistently providing both the irrational/ and rational perspectives.

Notes from the mark scheme and report

• irrational: habit, forgetfulness, ignoring the 10p cost and litter (Extract A, bags fell from 7 500m to 197m)
• rational: convenience, 10p is a tiny share of spending
• arguments either way count as KAA or evaluation
• answers often did not give both perspectives

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

A high number of students did manage to focus upon how firms are profit maximising and therefore it would be rational for them to increase prices at a time of excess demand. Many candidates however did misinterpret the question and focus upon the price mechanism and its features which was not a suitable and awardable response.

Notes from the mark scheme and report

• firms aim to maximise profit, so with excess demand (shortages of crisps and petrol) they can raise price
• price rises also ration demand
• answers that only described the price mechanism were not credited

Mark scheme, including the levels grid and indicative content

Notes from the mark scheme and report

• rational = utility maximising: cancelling over value for money and cost of living, switching to Disney+
• irrational: nudges, auto-play and binge-watching, forgetting to cancel free trials (Extract A)
• Level 3 must refer to Netflix subscribers

Mark scheme, including the levels grid and indicative content

Examiner's comment

This was the first of the levels-based questions, and candidates performed well, with a majority scoring high marks. Candidates understood how it is rational for fishing companies to maximise profit whilst the impact on society was problematic because of the ‘tragedy of the commons’ explored in the extract. Better candidates were able to clearly identify how maximising profits causes failure in the market for fish and went on to give clear examples using the extract.

Notes from the mark scheme and report

• fishing as much as possible is rational profit maximisation for each firm
• but the tragedy of the commons depletes stocks (90% depleted) and future profits, so it may not be rational long term
• Extract B

Mark scheme, including the levels grid and indicative content

Examiner's comment

Answers to this question were generally strong, with stronger candidates using economic theory to explain patterns. Most provided two paragraphs of KAA and two separate evaluative paragraphs. Better answers explored low PED and brand loyalty, asymmetric information, computation issues, deliberately confusing tariffs and habits. Fewer candidates questioned their thinking or evaluated beyond saying that in the long run information will improve as the regulator intervenes. Stronger candidates questioned the idea that staying with BT was irrational behaviour at all given the hassle for small savings and the brand trust value of paying more. This answer scores 6/10 marks. The candidate has addressed brand loyalty (Level 2) and lacking market information, 'knowledge ' (L2). The final paragraph is awarded one Level 2 evaluation. Overall the candidate achieves L2 (4 KAA) and L1+ evaluation (2e) as the evaluation fails to recognise different viewpoints. Try to ensure evaluation is not on the brief side. A safe approach to this would be to evaluate each reason separately. In the first paragraph the candidate addresses the issue of habitual behaviour and links their knowledge and understanding in context to a Level 3 standard. It was felt that there was a little lack of clarity so was awarded L3-. The next paragraph went on to evaluate this reason to a Level 2 ev+ standard. The candidate provided another reason, that of missing information to a L3+ and L2ev+ standard. Overall the candidate achieved L3 (5KAA) and L2ev+ (4ev) = 9/10 marks.

Notes from the mark scheme and report

• information gaps (elderly customers cannot compare prices) and irrational behaviour (habit, computation, brand loyalty, status quo bias)
• Level 3 needs at least two reasons
• evaluate e.g. small savings may make staying rational

Mark scheme

Examiner's comment

The majority of candidates were able to score between 3 and 4 marks for this question, and Extract B was an accessible source of information. Most candidates could identify examples of irrational behaviour in the extract, which could be developed analytically. Typical answers focused on inertia or computational problems to explain why four million households are still on the most expensive rates. More able candidates were able to identify a reason, explain it, and substantiate it with reference to the Extract. Less able candidates neglected to support their comments contextually. This answer scored 5 out of the available marks. The first paragraph starts well, with a clear reference to Extract B and then gives the reason of 'habitual behaviour'. The point is then clearly explained, gaining the first analysis mark. The second paragraph explores the concept of 'consumer computation', citing it a reason for not understanding how energy suppliers work. It is explained clearly though is not substantiated contextually. In an answer such as this be sure to refer explicitly to the extract to gain application marks. This answer achieved 6 marks out of 6. It begins by referring to the 4 million households still on the most expensive rates, scoring the first application mark, and then goes on to explore 'weakness of computation' as the reason, linking the explanation to the inability of consumers to calculate the additional utility that could be gained from switching. In the second paragraph the candidate again scores the application mark with a clear reference to the decade of rising energy bills and cites the reason of 'habitual behaviour' by way of explanation. This is then developed by saying consumers are too lazy to search for better deals, thus gaining the analysis mark.

Notes from the mark scheme and report

• two separate reasons, each identified, applied to Extract B and explained: inertia or habit, computation problems, information gaps (four million households on the most expensive rates, prices up 158%)
• report: weaker answers gave no context

Mark scheme, including the levels grid and indicative content

Examiner's comment

The question required candidates to assess the view that tobacco consumers switching to e-cigarettes is an example of rational behaviour. It proved to differentiate effectively between the quality of responses particularly at the top and lower end of the mark range. Typical responses carefully used the data to identify rational behaviour drawing on Figure 1 price comparisons, tobacco tax increases in Extract A or health concerns in Extract B. Level 2 responses tended to limit themselves to using the data and their own knowledge and only a confident understanding of the concept of rational behaviour in context could access Level 3. As a consequence many answers to this question followed a similar pattern with financial gains and health concerns being most common, more able candidates used the data to support their answers and discussed concepts such as utility. Some candidates were able to correctly define rationality although many thought it was predictable or sensible behaviour. This was a high scoring question with the majority of candidates using the data to evaluate fully. There was little evidence of candidates flipping KAA and EV, which was awarded as the mark scheme allowed. Responses which provided thin evaluation by just mentioning magnitude of price differences or tax rises only achieved a Level 1 evaluative award. Level 2 evaluation often referenced the data with information gaps as to the benefits or brand loyalty of cigarettes often coming up. 10 out of 10 marks awarded. The candidate achieves all 6 Knowledge, Application and Analysis marks available by securely achieving top Level 3 (L3KAA) in their first paragraph. They immediately answer the question by defining rational behaviour and linking their understanding in a fully integrated context. The candidate then demonstrates their evaluative skills in the second paragraph which carefully applies herding behaviour as irrational behaviour in context, achieving Level 2 evaluation (L2 EV). The final paragraph includes another evaluative comment raising the issue of computational problems with measuring welfare benefits in depth and in context. Given the quantity and quality of evaluation there is a case for flipping KAA and EV, to guarantee full marks, as indicated on the mark scheme. Make sure you develop key knowledge with concise explanations and precise use of data. Similarly, well-balanced evaluation will also be well explained and in context as in this example; albeit perhaps not so extensive given time constraints. 4 out of 10 marks awarded. This candidate starts by not correctly defining rational behaviour. The reference to health benefits is thin and borderline Level 1 or Level 2 KAA. The candidate then raises the issue of possible computational problems with lack of information but it is unclear and not totally convincing, receiving low Level 1 Ev and lifting the KAA award slightly. It received Level 2 and Level 1e – = 3+1Ev. It is essential that candidates take the time to carefully structure their responses. In this case using the data to identify rational behaviour; then identifying reasons for not being rational using the information provided. Careful revision of all Theme 1 concepts also helps ensure a candidate is not second guessing their response as they work through it.

Notes from the mark scheme and report

• rational: cheaper per cigarette (48p vs 7p), health gains (Extract B), utility maximisation
• against: information gaps and weak computation, habit and addiction, herd behaviour
• many thought rational meant predictable or sensible
• arguments either way count as KAA or evaluation

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question proved to be a challenge. Information gaps were not well explained and irrational behaviour beyond habitual shopping habits was badly explained. A lack of understanding of irrational behaviour meant that many candidates failed to secure high marks as did an over-reliance on aspects of the text without explaining or considering whether these were truly examples of information gaps. Many candidates picked up marks by exploring other causes of food waste that they were more able to explain like substandard packaging. They also picked up marks for considering the future with better technology and forecasting. This answer achieves a mark of 10/10. This candidate displays an excellent ability to link knowledge and understanding in context using relevant and focused examples which are fully integrated and as a result achieved a top Level 3 KAA award (6/6). Other candidates were stronger on theory than this but both approaches apply their economic ideas to the broad elements of the question. The evaluation is also to a top level in displaying relevant reasoning and appropriate reference to context as well as being critical of the evidence. Try to fully integrate theory and context in both your KAA and evaluation to guarantee top level marks. This answer achieves a mark of 3/10. The candidate provides a narrow response with a limited use of context, achieving lower level for KAA and no evaluation. Best practice with the full A Level exams is to ensure you have covered the entire specification. Make sure in advance of the exam that you know which questions, such as this one, require evaluation.

Notes from the mark scheme and report

• information gaps: suppliers and supermarkets cannot forecast demand and harvests (4.1m tonnes before supermarkets)
• irrational behaviour: habit, weak computation by consumers (7m tonnes)
• evaluate with other causes e.g. packaging, use-by dates
• report: "This question proved to be a challenge" and irrational behaviour was badly explained