1.5 Rational Decision Making and Marginal Analysis

People take actions to maximize their benefit based on rational decision-making.

An incentive is a motivation or reward that encourages specific behaviors or actions.

A process to evaluate risks

A decision-making process comparing costs and benefits

A method for financial forecasting

A strategy for marketing analysis

Deciding whether or not to go to college

Deciding how much time to spend studying

Deciding whether or not to go to the mall

Deciding how many employees to hire

Additional

Total

Average

Fixed

Deciding whether or not to hire a 3rd employee

Deciding how many hours to study

Deciding whether or not to go to college

Deciding where to eat

Cost-Benefit focuses on yes/no decisions

Marginal Analysis focuses on how many decisions

Both are used for economic decisions

Cost-Benefit is more complex than Marginal Analysis

MB > MC

MB = MC

Always stop

MC > MB

The total satisfaction from all units consumed

The additional satisfaction from consuming one more unit

The satisfaction from the first unit consumed

The difference between total and average utility

The more you consume, the more satisfaction you get from each additional unit.

The more you consume, the less satisfaction you get from each additional unit.

Marginal utility remains constant regardless of consumption.

Marginal utility increases with each additional unit consumed.