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Consumer Behavior and Rational Choice
1. Consumer wants and desires are basic determent of the nature and quantity of the goods and services produced in any economic system. Recent US government figures show that consumers spend about 79% of their income on goods and services; the rest goes for taxes and saving. Much of their expenditures for goods and services goes for housing, food and drink, and transportation.
2. The model of consumer behavior and rational choice explains how an individual consumer allocates his or her income among various commodities. This model assumes that the consumer’s preferences are transitive and that commodities are defined so that more of them is preferred to less. The consumer’s preferences can be represented by a utility index. Utility is a number that indexes the level of satisfaction derived by the consumer from a particular market basket. Market baskets with higher utilities are preferred over market baskets with lower utilities.
3. The model of consumer behavior and rational choice recognizes that preferences alone do not determine the consumer’s actions. Given the consumer’s preferences, as reflected in his utility index, the choices open to him are dictated by the size of his money income and the nature of commodity prices. The consumer is assumed to choose the market basket that maximizes his utility. If the consumer maximizes his utility, his income is allocated among commodities so that, for every commodity he buys, the marginal utility of the commodity is proportional to its price. In other words, the marginal utility of the last dollar spent on each commodity is made equal for all commodities. Sometimes consumers are misled by false advertising and other deceptive practices. For the price system to work well, the consumer must be protected against such deception and fraud.
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Under capitalism the range and amount of goods and services to be produced are determined by the government.
Consumers spend all their income on goods and services.
Consumer choice is a minor factor in market economy.
The range and amount of goods and services produced in an economy are determined by consumer choice.