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Chapter 1: Problem 1

Briefly discuss the meaning of each of the following economic ideas: People are rational, people respond to economic incentives, and optimal decisions are made at the margin.

Short Answer

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In economics, 'people are rational' implies that individuals make decisions to maximize their benefit or satisfaction. 'People respond to economic incentives' refers to the fact that individuals' behaviors can be swayed by changes in benefits, costs or rewards. And 'optimal decisions are made at the margin' suggests that the best decisions are ones which weigh the incremental costs and benefits, rather than assessing total changes.

Step by step solution

01

Understanding the Concept of Rationality

The concept of 'people are rational' in economics refers to the assumption that people always make decisions that provide them with the greatest benefit or satisfaction, given the choices and information they have. Rational behavior involves making choices with the goal of maximizing utility.
02

Understanding Economic Incentives

'People respond to economic incentives' refers to the idea that changes in benefits, costs, or rewards can influence people's behavior. An economic incentive might be a benefit that motivates someone to behave in a certain way, while a disincentive would deter them from that behavior.
03

Optimal Decisions at the Margin

'Optimal decisions are made at the margin' is an economic idea that decisions are best made when only considering the incremental or marginal change of an action, not the total change. This is also known as marginal analysis, where decision makers evaluate whether the benefit of one more unit of something will exceed its cost.

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