2023 ACJC Central Economic Problem Tutorial Suggested Answers

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics 2023 H1 H2 CENTRAL ECONOMIC PROBLEM Tutorial Worksheet: Suggested Answers Section A: Discussion Questions Question 1: Rational Decision Making (Adapted from 2021 H2 A Levels Question 1) (a) Explain how consumers act rationally to decide whether or not to buy a bicycle. Consumers aim to maximize utility when deciding to buy a bicycle or not. Main Point 1: Decision Making Framework Topic Sentence: Consumers determine whether buying a bicycle is beneficial and feasible by comparing the benefits, costs, and constraints. Constraints: The amount of savings and budget the consumer has accumulated for the bicycle. Benefits:  The satisfaction gained from using the bicycle  Improvement of health due to riding the bicycle for exercise Costs:  Explicit Cost – the monetary cost of purchasing the bicycle  Opportunity cost - Net benefit of next best alternative foregone: Potential satisfaction derived from the consumption of the alternative / i.e. another good or service (beside bicycle) Buying a bicycle is beneficial if the benefits outweigh the costs, and feasible if the costs are within the benefits. In addition, the consumer may also consider:  Information – Availability of information on the type of bicycles that suit the lifestyle of the consumer best (E.g. should one use a folding bicycle or a road bicycle to commute to work etc.)  Perspectives – His family members who may be sharing the bicycle with him or helping to pay for it. Main Point 2: Weighing of costs and benefits

©Property of ACJC Economics Dept./H1H2 EC 2023/The Central Economic Problem Page 2 Topic sentence: To maximise utility, consumers consume bicycles up the the point where marginal benefit = marginal cost. Explanation:  To maximize self-interest, consumers would increase consumption when the additional unit consumed generates additional net benefit (i.e. marginal benefit exceeds marginal cost).  For instance, for a consumer to maximize utility, every dollar spent by the consumer on a good or service (in this case, purchase of a bicycle) must bring additional net benefit (MB>MC), in such case, the consumer should buy an additional bicycle (i.e. Q1th unit). In so doing, the additional net benefits would lead to an increase in the total net benefit.  If the additional dollar brings additional net cost (MB<MC), the consumer should not spend on an additional bicycle (i.e. Q 2th unit). In so doing, the additional net costs would lead to a decrease in the total net benefit.  Hence in the market of a bicycle, the optimal spending amount is attained when the MB equals MC (MB = MC) which suggests that additional spending can no longer yield additional net benefit.  At this point where MC=MB, the total net benefit is the maximum possible.   This process of examining