3.5 Review

Permission clearance pending

Amazon’s expansion has been driven by a business model involving a consumer-cantered approach. The centrepiece here is a selling and growth strategy called, the Amazon Flywheel. This was unveiled in 2001 by the company’s founder Jeff Bezos, and is illustrated here in figure 3.7:

FIGURE 3.7 The Amazon flywheel concept for growing the company, which starts slow and gains momentum The Amazon flywheel … It gains momentum and grows bigger with time 4. lncreased number of sellers 3. Increased volume of customer traffic

5. Lower cost structure with more economies of large-scale 2. Good quality shopping experience for customers

1. Wide range of goods 6. Lower prices UNCORRECTED PAGE PROOFS The Amazon flywheel involves: • having a wide product range • maximising the customer’s on-line shopping experience

• boosting sales and traffic volumes • attracting more sellers who want to be listed on the site so as not to miss out on sales • broadening the selection or product range available and further enhancing the consumer’s experience

In addition, growing with a business model like this, it allows for: • a lower cost structure (with smaller profit margins but bigger volumes) enhancing greater economies of large-scale production or operations • using profits in the shorter-term to the lower prices • further improving the experience for consumers, and • boosting traffic volumes, adding to Amazon’s momentum for the ongoing growth.

Consumer-focused and the consumer shopping experience Shopping online, consumers want to conveniently and easily view the range of products available and find what they are looking for, go to the check-out and then monitor the despatch and arrival of their purchase. The Amazon website is set up to do this in a user-friendly way, even for those not well acquainted with online shopping. This enhances the experience for customers who will return for their next purchase and recommend Amazon to friends. It helps to grow the traffic volumes and the company’s momentum and expansion. Customer service is an especially critical part of the shopping experience, including simple to use tracking tools and arrangements for returns. Problems are mostly dealt with promptly by effective customer service that has won various awards. Diversification and a wide selection of products for consumers Starting with selling books online, Amazon has certainly diversified. Nowadays, the company does this with over 350 million products, each containing photos and complete product information. This allows customers to choose and readily compare reviews. Sellers, too, are keen to get listed on the firm’s site because otherwise they will miss out on sales. Partly because of the wide selection of products (for example, including over 3000 results for vegetable soup, or 35 000 results for nuts), Amazon has become the default shopping channel for many consumers. Cheaper consumer prices Customers often want the best product at the lowest possible price. Amazon does this by making a tiny margin on each sale, but then making up for this with huge sales volumes that then provide cost savings or economies of large-scale operations. In addition, with so much choice, sellers are even more conscience of their competitors, knowing consumers will make product comparisons. Faster customer delivery Consumers have a strong preference for fast access to their purchases, rather than face long delays and delivery times with expensive add-on shipping costs. In general, Amazon offer two-day processing and shipping, sometimes free of charge, depending on the buyer’s location. There are several reasons why this is possible ranging from its extensive warehouses network, operations that run around the clock (not just within normal work hours), the ownership of fleets of trucks and planes, the chartering ocean shipping, and the employment of over 1.6 million staff. These unrivalled logistics add to the positive shopping experience for consumers, ultimately driving success. UNCORRECTED PAGE PROOFS

3.4 Activities

Students, these questions are even better in jacPLUS

Receive immediate feedback and access sample responses Access additional questions

Track your results and progress

Find all this and MORE in jacPLUS 3.4 Exercise 3.4 Quick quiz 3.4 Exercise 1. Explain why it is important for firms to have a customer, or consumer-centred focus? (2 marks) 2. a. Drawing on the traditional viewpoint of consumer behaviour and on more recent behavioural economic theory, identify and outline the strategies used by firms to influence consumers. In your answer, refer to the 5 Ps of marketing and multi-branding. Illustrate your answer by referring to specific businesses. (5 marks) b. Explain what is meant by the concept of the nudge, when firms attempt to influence consumer behaviour. (2 marks) c. Identify and outline two examples of a nudge that might be used by a firm selling trendy clothing. (2 marks) 3. This question is about Uber that has recently generated around $17 billion in revenue annually from transporting passengers, the delivery of Uber Eats, and other services. a. Using online research, describe the general nature of Uber Technologies Inc.’s operations. (4 marks) b. Again, using research, explain how Uber has managed to appeal to so many consumers. (4 marks) c. Examine an Amazon Flywheel type diagram adapted to Uber’s operations in figure 3.8. Referring to this diagram, explain how you think this strategy has helped to grow its customer base. (3 marks) FIGURE 3.8 Uber’s flywheel and liquidity network effects Permission clearance pending UNCORRECTED PAGE PROOFS

4. McDonalds is a successful business in Australia. Using online research, identify and explain three important strategies used by this company to affect the behaviour of consumers. Explain whether these methods differ from those used by its rival, Hungry Jacks? (3 marks)

Fully worked solutions and sample responses are available in your digital formats.

UNCORRECTED PAGE PROOFS

3.5 Review

Hey students! Now that it's time to revise this topic, go online to:

Review your results Watch teacher-led videos

Practise past VCAA exam questions

Find all this and MORE in jacPLUS 3.5.1 Summary The differences between traditional economics and behavioural economics • Traditional economics predicts that when making economic decisions, consumers: • behave rationally • are selfish and self-interested • have ordered priorities • want to maximise personal gains, pleasure, or utility • always have perfect knowledge or complete information relating to the decision and do not act on impulse • dislike pain. • Behavioural economics fills in the gaps left by the traditional viewpoint of consumer behaviour, to deepen our understanding. It proposes that consumers take short cuts and have biases that are used in decision making. These lead to less predictable outcomes. The ideas include the concepts of: • bounded rationality • bounded self-interest • bounded willpower • herd behaviour • framing bias • anchoring effect • status quo • vividness • overconfidence • present or short-term bias • narrative fallacy • the nudge. The effectiveness of strategies used by government to influence consumer behaviours • When there are instances of market failure caused by particular consumer decisions, the government often uses strategies including: • incentives (to encourage certain decisions) • disincentives (to discourage certain decisions) • educational advertising campaigns (so people are better informed and make improved decisions). These policies consider both the traditional viewpoint of consumer behaviour, as well as the theories of more modern behavioural economics. In this context, the aim of government intervention is to increase efficiency in UNCORRECTED PAGE PROOFS resource allocation and improve society’s general wellbeing. • More specifically, government strategies to influence consumer behaviour include: • the excise tax on alcohol, making it more expensive to buy, contracting consumer demand and reducing personal and social harm (e.g. consider ideas of self-interest, bounded willpower and perhaps herd behaviour)

• the excise tax on tobacco, making it more expensive to buy, contracting consumer demand and reducing personal and social harm (e.g., consider ideas of self-interest, bounded willpower, and perhaps herd behaviour) • educational advertising campaigns used to provide improved knowledge and alert people to the dangers of smoking, drinking, COVID-19 threats, and sun exposure (e.g., consider self-interest and/ or bounded self-interest, bounded willpower, and perhaps herd behaviour) • private health insurance tax rebate and free COVID-19 vaccinations and testing seek to make it cheaper and more attractive for consumers, increasing demand and easing pressures on the public health system (e.g. appeals to self-interest) • rebates or subsidies for rooftop solar panels to make them cheaper and more attractive for consumers, along with advertising that is designed to help reduce CO2 emissions from burning fossil fuels so as to improve economic and environmental outcomes (e.g. appeals to self-interest and/or bounded self-interest) • being guarantor under the first home loan deposit scheme for consumers (who are finding it impossible to meet the normal 20 per cent deposit requirement by banks) so they can get a loan with as little as 5 per cent deposit, supposedly making it easier for some to own their home (e.g. appeals to the ideas of self-interest, and those with a short-term or present bias). • Some of these government strategies have been quite effective. For example: • the rise in the rate of excise tax on tobacco and alcohol, along with laws limiting their purchase • some campaigns involving educational advertising • free COVID-19 vaccination and testing programs • solar panel rebates or subsidies.

The effectiveness of strategies used by businesses to influence consumer behaviours • All businesses use strategies to affect consumers and increase sales. However, some are more successful than others. • Successful businesses are consumer-centred and try to make the shopping or buying experience a very positive one. • To steer consumers towards buying their product and increasing sales, firms use marketing ideas drawn from both the traditional viewpoint of consumer behaviour, as well as the more recent ideas drawn from behavioural economics. These include: • Applying the right mix of the 5 Ps of marketing: – Product — a product that is better than the rest, meets a need, and solves a problem for consumers – Price — must be profitable but also offers consumers value for money – People — able to enhance the consumer’s shopping experience – Place — convenience for consumers and depends on the product or service sold – Promotion — appropriate and positively engages the target consumer audience. • Using various nudges to gently redirect consumer decision in the required direction so they purchase the company’s products and services. • Utilise multi-branding to attract more consumers and drive up sales. • One company that has successfully attracted many customers is Apple inc. • Typically, Apple only makes a product if it feels that it will be better than its rivals. • The product is stylish, standardised, and easy for consumers to use. • Consumers expect top quality service and an impressive in-store, hands-on experience with knowledgeable service. • The company tries to keep ahead of rivals through product research and development. • The firm is attempting to become more socially and environmentally responsible to help increase its acceptance. • Amazon.com is another company that has been successful by trying to make consumers its number one focus. Growing success is based on the concept of the so called, Amazon flywheel: • Amazon’s flywheel gains momentum • Has a wider product range

UNCORRECTED PAGE PROOFS

• Improves the consumer’s shopping experience • Grows traffic volumes • Attracts even more sellers seeking increased sales, which adds to competition, increasing the product range • Even more economies of large-scale production, lowering average costs • Cheaper consumer prices • Further improves the shopping experience, and so on, growing the business.

3.5.2 Key terms Amazon.com’s flywheel is the model used to progressively grow online sales and the company, by maximising the customer’s on-line shopping experience, boosting sales and traffic, attracting more sellers and competition, broadening the selection or product range available, further enhancing the consumer’s experience, and so on. In addition, growing the business like this allows for greater economies of large-scale production or operations. It means a lower cost structure (with smaller profit margins but big volumes) and reduced prices, growing the company. Anchoring effect comes from behavioural economics. Anchoring is an arbitrary starting or reference point that affects a consumer’s perception. It is used by consumers to make a judgement, comparison, assessment or ranking of possible choices. It can be used by businesses to manipulate consumer choice. Behavioural economics is a relatively recent field of study based on the ideas drawn from psychology and economics. It proposes that consumers do not always make rational and self-interested decisions. Instead, they take short cuts and have biases that affect their choices. Bounded rationality is an important theme in behavioural economics. It suggests that in making decisions, there are limits on consumer rationality. Consumers do not always have complete information for every decision. Sometimes they do not act in a self-interested way, and often they take short cuts and have biases that can reduce the quality of their decisions. Bounded self-interest is an idea that comes from behavioural economics. It says that while consumers can be selfish, this is not always the case. Their decisions can be affected by other beliefs like fairness and a desire to help others. Bounded willpower is an idea from behavioural economics, and says that sometimes, consumers do not have the necessary willpower or determination to make rational decisions. Instead, they can end up taking the easy and less rational option, whichmay not be in their best long-term interest and hence may later regret their choice. Excise tax is an indirect levy used by the government to affect people’s behaviour by making the consumption of some potentially socially harmful goods, like alcohol and tobacco, less affordable and less wanted. By acting as a disincentive to consumers, it can change their behaviour. First Home Loan Deposit Scheme is used by the government to help 10 000 eligible first-home low-income buyers to purchase their home sooner with a saved deposit of as little as 5 per cent of the purchase price (normally the required deposit for a bank loan is $20 000). It aims to be an incentive for home ownership. Framing bias is an idea from behavioural economics. It says that consumer choices can depend on how the same information, facts or ideas are presented. It can be used to increase the likelihood that a particular choice will be made. Health insurance rebate is a government incentive designed to subsidise consumers to take out private health insurance rather than rely on the public health system, by subsidising or lowering the cost of premiums. Herd behaviour is an idea from behavioural economics and suggests that, sometimes, consumers just follow what the rest of their peers are doing, rather than reaching their own rational decision. Market failure exists when the free or unregulated operation of the price system (demand and supply) causes resources to be used inefficiently and in ways that reduce society’s general satisfaction and wellbeing. It is normally lessened by government intervention (e.g. pass laws, use regulations, run educational advertising, use of an excise tax or pay subsidies). UNCORRECTED PAGE PROOFS

Narrative fallacy is an aspect of behavioural economics where consumers can be sucked into various scams simply because of the plausible and impressive way information is presented, often focusing on a story with few facts.

Nudge is a marketing idea drawn from behavioural economics. It involves providing a gentle reminder, a prompt, or something that catches attention and seeks to alter people’s behaviour in a predictable and wanted way, without forcibly limiting their choices.

Overconfidence is an aspect of behavioural economics where in making decisions, consumers overestimate their current state of knowledge or skill and hence make ill-founded and non-rational choices. Present or short-term bias is an aspect of behavioural economics where in making a decision, consumers have a bias towards decisions that provide more immediate benefits, rather than being more patient and taking a longer-term assessment that may be more beneficial and rational. Risk aversion bias is an aspect of behavioural economics where some people make choices that place more weight on avoiding making a loss, rather than making an equivalent gain. Solar panel rebates are a government incentive using subsidies to encourage households to install solar roof panels, by making them cheaper. The scheme is designed to help reduce CO2 environmental emissions and slow climate change. Status quo is a short cut and an aspect of behavioural economics where consumers fail to examine all the options, instead sticking with what they have previously decided. The five Ps of marketing involved in selling to consumers includes consideration of the Product (i.e. one that is better than the rest, meets a need, and solves a problem for consumers), Price (i.e. must be profitable but offer value for consumer’s money), People (i.e. staff who are able to enhance the consumer’s shopping experience), Place (i.e. convenience for consumers), and Promotion (i.e. appropriate strategy that engages the target consumer audience). Traditional viewpoint of consumer behaviour is that when making economic decisions, consumers are rational, self-interested, knowledgeable or well informed, try to maximise marginal utility or satisfaction, and have ordered preferences. This means that their actions are predictable. Vividness is an aspect of behavioural economics where in making decisions, consumers place undue weight on just a small piece of information that stands out and catches their eye. Other possibly important considerations in a decision are downplayed so this can lead to irrational decisions. Resourceseses Resources Digital document Key terms glossary (doc-37947) 3.5.3 Practice school-assessed tasks OUTCOME 3 Explain how behavioural economics complements traditional understandings of decision making, and analyse the effects of behavioural economics insights on consumers and other economic agents. TASK 1: AN INVESTIGATION AND REPORT — EXPERIMENTS WITH BEHAVIOURAL ECONOMICS Part A — Do people always make self-interested and rational decisions? As an experiment in behavioural economics, play the Ultimatum Game. Behavioural economists have conducted experiments to demonstrate that individuals do not always act rationally, as traditionally assumed. We are going to test this theory of behaviour. Here, two people are needed, preferably strangers. Player 1 is given $100 and is required to share it with player 2 by deciding how to split or divide the money. Only if player 2 accepts the offer made by player 1, will either player get to keep the money. The traditional theory of rational behaviour would predict that even if the split is very uneven, where player 1 perhaps keeps $99 and player 2 receives just $1, player 2 would accept the offer thinking that it’s better to go away with something than nothing! However, this may not necessarily be the case if player 2 is motivated by other values; for example, perhaps player 2 believes that player 1 is being unfair and greedy. So, while not in UNCORRECTED PAGE PROOFS their self-interest, player 2 may reject the offer of $1 simply because player one is seen as unreasonable, unfair, and selfish. Player 2 may even get pleasure in rejecting the offer to teach player 1 a lesson! Had the offer been 50/50 or 60/40, perhaps it would have been accepted. In other words, there are limits to self-interest in making decisions, possibly reflecting personal values like fairness.

To complete this research task, you (and perhaps with the help of a partner) will need to complete this game five times, asking 5 different people to be player number 2. As player 1, you will trial your offer (or split of the money) differently for each game, recording results on a table similar to that below:

Record of student results:

Game number 1–5 The offer or split of the $100 for each of the 5 games Result for each game (player 2 agrees/ disagrees, plus a comment about the reaction of player 2)

Game 1/first player 2 Offer 1 — $99 to you, $1 player 2

Game 2/second player 2 Offer 2 — $90 to you, $10 player 2

Game 3/third player 2 Offer 3 — $80 to you, $20 player 2

Game 4/fourth player 2 Offer 4 — $60 to you, $40 player 2

Game 5/fifth player 2 Offer 5 — $50 to you, $50 player 2 Using this research data, you will be able to draw conclusions about whether most consumers behave rationally (i.e. the traditional viewpoint). In writing up your report on the experiment, you might like to set it out under the following headings: 1. Title of the task 2. Aim of the task 3. Setting up the experiment 4. Table of results for the 5 games 5. Conclusions (about the extent to which people acted in a rational, self-interested way).

Part B — When making decisions, do people have a short-term or present bias or a longer-term preference?

There are two options here from which to choose. Option 1: Student study preferences The traditional viewpoint is that people behave rationally, although behavioural economics has challenged this. The task here involves completing research using a simple questionnaire designed to test student attitudes about receiving financial incentives to lift their grades in Economics. The reward for action will either be paid over the short term or over a longer term. The research task seeks to test whether students have more of a short-term, immediate, or present bias, as opposed to a receiving a greater reward over the longer term. You (and perhaps a partner for assistance) need to ask 10 students to complete the questionnaire. While the sample size is small, let’s see if any conclusions are possible and whether they match what behavioural economic theory predicts. Here are the two deals for each student to consider before giving their response: • Option 1 — Would the student prefer to get $10 as a reward, on condition that they manage to lift their score in next week’s Economics test by one grade above their previous running average? The reward for success would be paid immediately after results are available (assuming a successful outcome). OR • Option 2 — Would the student prefer to get $500 but only on condition that they successfully manage to lift their end-of-semester Economics score by one grade (assuming they are not already on an A grade)?

Record of survey results: Student number 1–10 Student answers: Option 1 (smaller immediate reward)

Student answers: Option 2 (bigger long-term reward) Any comments Student 1 UNCORRECTED PAGE PROOFS Student 2 Student 3 Student 4 Student 5

Student 6 Student 7 Student 8 Student 9 Student 10

Again, in writing up your report on the experiment, you might like to set it out under the following headings: 1. Title of the task 2. Aim of the task 3. Setting up the experiment 4. Table of results for the 10 students surveyed 5. Conclusions (to test the extent to which Economics students have a present or short-term bias).

OR

Option 2: Children’s reward preferences As an alternative to test present bias, this experiment could be conducted with a group of say 5 young children in a room and some yummy lollies that everyone is sure to love (e.g., snakes). Each child will have a bowl with 5 lollies in it sitting in front of them (Warning: You must first check carefully with each person to ensure that they have no allergy concerns or reactions to these lollies). The offer is that the children are told they have a choice in their behaviour: ◦ Option 1 — Would you like 1 lolly after you wait 5 minutes (in which case you would be disqualified from receiving even more later)? ◦ OR Option 2 — Would you like to receive all 5 lollies, but only on condition that you are prepared to sit there patiently and wait for 15 minutes? The survey results could be recorded on a table similar to that below:

Record of survey results:

Student number 1–5 Student answers: Option 1 (smaller immediate reward)

Student answers: Option 2 (bigger long-term reward) Your comment Student 1 Student 2 Student 3 Student 4 Student 5 Again, in writing up your report on the experiment, you might like to set it out under the following headings: 1. Title of the task 2. Aim of the task 3. The process and setting up the experiment 4. Table of results for the 5 students 5. Conclusions (to test the extent to which children have a present bias or short-term bias). TASK 2 — A CASE STUDY REPORT ON AN INVESTIGATION INTO HOW A BUSINESSES ATTEMPTS TO INFLUENCE CONSUMERS UNCORRECTED PAGE PROOFS Businesses try to influence consumers and win customers using a whole range of strategies. This task involves some internet research about a well-known company that you have selected. For example, it might be based on one of the following: • Facebook • Afterpay • Netflix

• Moderna • Shopify • Epic Games • Tesla • SpaceX • Microsoft • Walmart • Airbnb • Peloton.

You might like to structure your investigation and report around the following headings: 1. Describe the company’s background (e.g. history, what it sells, how big). (2 marks) 2. With some reference to the traditional viewpoint of consumer behaviour and behavioural economic theory, identify and explain a range of strategies used by the company to influence consumers and grow their business. (6 marks) 3. Evaluate how successful this company has been over recent years. (2 marks) 3.5 Exam questions

Students, these questions are even better in jacPLUS

Receive immediate feedback and access sample responses Access additional questions

Track your results and progress Find all this and MORE in jacPLUS 3.5 Section A: Multiple choice questions Question 1 MC Which of the following descriptions is not applicable to the traditional viewpoint of consumer behaviour? A. Consumers have ordered preferences. B. If they can, consumers stick to the status quo when faced with decisions rather than consider other options. C. For consumers, the maximisation of marginal utility is important. D. Consumers spend much time researching their options. Question 2 MC Which of the following statements about business profit maximisation is least correct over the longer-term? A. This behaviour is consistent with the viewpoint of behavioural economics about how people make choices. B. It typically means that businesses seek to minimise their costs. C. Firms need to use strategies that grow their customer base and level of sales. D. Experience shows that firms are often more likely to succeed by putting the customer first and creating a positive shopping experience. UNCORRECTED PAGE PROOFS

Question 3

MC Governments sometimes intervene and use various policies to reduce market failure. Which of the following statements about market failure is least correct?

A. Market failure occurs when price signals cause resources to move into areas that reduce society’s general wellbeing. B. Market failure can mean that the production of profitable goods can sometimes reduce society’s general wellbeing. C. Market failure can result in the production of goods and services that involve wider social costs. D. Market failure cannot occur when there is strong competition.

Question 4 MC Which statement in relation to behavioural economics is least correct? A. Most consumers have bounded rationality and take short cuts in making decisions. B. Most consumers have biases that can cause them to be non-rational when they make decisions. C. Most consumers seek to maximise satisfaction and utility when they make decisions. D. Sometimes, consumers think of other people when making decisions, even if this means a loss for them. Question 5 MC Feeling hungry after school, you go to the supermarket and instead of buying fresh fruit, you purchase and immediately consume two giant blocks of chocolate. This is likely to be an example of: A. narrative fallacy. B. over confidence. C. market failure. D. bounded willpower. Question 6 MC There are two identical glasses of soft drink — one is labelled ‘half full’ and the other is labelled ‘half empty’. You choose the one marked ‘half full’. Behavioural economics would be most likely to explain that this is as an example of: A. bounded self interest. B. bounded rationality. C. framing effects. D. herd behaviour. Question 7 MC Referring back to question 6 above, this decision could best be viewed as an example of: UNCORRECTED PAGE PROOFS A. rational behaviour. B. irrational behaviour. C. maximising utility. D. bounded willpower.

Question 8

MC After hearing many news reports of lots of investors selling their shares during the collapse of the stock market, you also decide to sell. This would be best described as an example of:

A. framing bias. B. herd behaviour. C. vividness. D. rational decision making.

Question 9 MC Running up a huge credit card debt for non-necessities is most likely to be an example of: A. vividness. B. over-confidence bias. C. anchoring effect. D. bounded willpower. Question 10 MC The government decides to pay students $500 at the end of each year if they successfully complete Years 11 and 12 with scores of at least a B average. This could be seen as: A. an incentive to help overcome the problem of present bias. B. a policy to help reduce a market failure where too few resources are allocated towards gaining skills and knowledge. C. a measure designed to encourage students to do more homework. D. all of the above. Question 11 MC You are shopping in the supermarket for steak. On the food label, one packet is marked, ‘contains 20 per cent fat’ and the other is marked, ‘is 80 per cent fat free’. You go for the latter pack of steak. This is an example of: A. framing bias. B. anchoring effect. C. bounded willpower. D. all of the above. Question 12 MC It’s a hot day and you would love an ice-cream. Your mother said, ‘yes you can do that’, but also made another offer that if you immediately clean up your disgusting room first (that will take you about 2 hours), you can have a can of soft drink as well. You decide to just go for the ice-cream now. This is most likely to be an UNCORRECTED PAGE PROOFS example of:

A. framing bias.

B. anchoring effect.

C. rational decision making.

D. none of the above.

Question 13

MC To do their bit for the environment, one supermarket is trying to decide which option is likely to be more successful in changing consumer behaviour — either charging $0.50 for each plastic carry bag, or if consumers bring their own giving them a discount off their total bill of $0.50. Based on behavioural economic theory, they decide that the $0.50 per bag would be a more effective way of reducing plastics than offering the discount. Their reasoning is likely to be based on the idea that: A. consumers have a greater aversion to loss than gain. B. consumers will do as others do and display herd behaviour. C. the anchoring effect will make it more effective. D. the status quo will make it more effective. Question 14 MC A store selling electrical appliances marks down a TV from $1000 to $999.99. Their reasoning is based on: A. many consumers make rational decisions. B. consumers want to maximise utility. C. consumers are influenced by the anchoring effect. D. all of the above. Question 15 MC Insurance companies are most likely to charge young drivers more for premiums because: A. the overconfidence by some young drivers means higher average accident rates and payouts. B. they want to keep premium rates lower for experienced and more cautious drivers. C. young people are more likely to travel greater distances and use their vehicle more frequently than old people and hence have a greater chance of accidents. D. all of the above are likely. Question 16 MC Amazon.com has used various strategies to attract customers, grow profits and expand their business. Which answer is least correct? A. Amazon takes a very low profit margin on each sale, keeping prices down. B. Amazon’s low prices attract extra consumers or traffic so more sellers want to be listed adding to greater consumer choice and price competition. C. Amazon sells mostly poor quality, dodgy products because of weak competition. D. Amazon gains economies of large-scale operations, cutting unit costs and allowing them to keep prices lower. Question 17 UNCORRECTED PAGE PROOFS MC Which of the following is not classified as a nudge?

A. Putting out free fresh fruit for children to eat whilst parents are shopping at the supermarket B. Well known sporting personalities endorsing the consumption of Performance Lite Milk C. The anti-drink drive advertising campaign D. The excise tax on petrol

Question 18

MC Which of the following is seen as a nudge?

A. A law requiring that all bike riders wear helmets B. Fines for leaving litter on the beach C. A fitness club allowing free trial sessions for potential patrons D. An automatic homework detention after school when tasks are not completed on time Question 19 MC The government introduces a tax on sellers of sugary soft drinks. This would change consumer decisions and behaviour by: A. pushing up the price to act as a disincentive. B. depressing consumer demand. C. making these drinks less profitable to sell, reducing the number of sellers and supply. D. all of the above. Question 20 MC Which statement is least correct about the likely impact of a $5000 government subsidy paid to unemployed individuals who undertook and successfully completed a two-year, skills training course designed to reduce market failure? A. There would be an increase in the demand for skills courses at tertiary institutions and training colleges. B. It would be seen as an incentive for consumers possibly changing their behaviour. C. It might be less effective and popular than originally hoped because of its longer-term nature and the present bias of many individuals. D. Over time, it would fail the help reduce the skills shortages currently limiting Australia’s rate of economic growth and the expansion of new industries. 3.5 Section B: Extended response questions Question 1 (4 marks) a. Clearly distinguish the traditional viewpoint of consumer behaviour and decision making from that proposed by behavioural economic theory. (4 marks) Question 2 (4 marks) Distinguish the following terms: • Bounded self-interest • Anchoring effect • Bounded willpower • Herd behaviour (4 marks) UNCORRECTED PAGE PROOFS

Question 3 (3 marks)

You are about to purchase a new electric scooter for getting around the neighbourhood with your mates. Referring to behavioural economic theory, identify and outline three non-rational biases that would be likely to affect your decision between brand A (the Segway Ninebot Kickscooter Max) and brand B (the Glion Dolly). (3 marks)

Question 4 (3 marks)

Assume that as part of its promotional advertising campaign, the company selling the Razor E100 electric scooter was desperately trying to lift its profile amongst potential scooter consumers. Identify and outline three nudge strategies that the company may try. (3 marks) Question 5 The Australian government often intervenes to reduce market failure. a. Explain the meaning of market failure. b. Identify two important examples of market failure that the Australian government attempts to fix through its policy intervention. Explain why these problems exist. In each case, outline an appropriate corrective policy that has been used by the government. (4 marks) Question 6 (3 marks) Examine the four images relating to Burger King. Assume these were used as part of an advertising campaign to boost sales. Referring to the explanations proposed by behavioural economic theory, identify and outline the type of bias or irrational behaviour that may cause some consumers to take short cuts and purchase this product: a. b. Permission clearance pending UNCORRECTED PAGE PROOFS

c.

d. (3 marks) Question 7 (5 marks) Examine the images below for two advertisements for the same vehicle, before answering the questions that follow. Permission clearance pending UNCORRECTED PAGE PROOFS

Permission clearance pending

a. Explain what is meant by a framing bias as a concept used in behavioural economics. (2 marks) b. Explain the nature of the advertising framing bias in the lower part of the image, and how this might affect the decision made by consumers. (3 marks) Hey Teachers! Create custom assignments for this topic

Create and assign unique tests and exams Access quarantined tests and assessments

Track your students results Find all this and MORE in jacPLUS UNCORRECTED PAGE PROOFS