Principles of Individual Decision Making

Principles of individual decision-making: According to textbook ISBN: 9780136021766 Author: R. Glenn Hubbard People are rational: Economist assume that consumers and firms use all available information as they act to achieve their goals. People respond to economic incentives: Economists emphasize that consumers and firms consistently respond to economic incentives. Optimal decisions are made at the margin: Economists use the word marginal to mean “extra” or “additional”. Economists reason that the optimal decision is to continue any activity up to the point where the margin benefit equals the marginal cost.

In symbols, where MB = MC. Optimal decisions are made at the margin. Provide an example of a decision in which you compared the marginal benefits and the marginal cost associated with that decision I was a customer of Verizon Wireless for several years. Even though I was satisfied with the service, I wanted to change my Black Berry cellphone for an Iphone. I waited two years with the expectation that eventually Verizon will sell Iphones and I wouldn’t have to pay the penalty for changing carriers.

What are the marginal benefits and marginal costs associated with that decision? The marginal benefit is that I will be a more satisfied customer by utilizing the newest technology in cellphones if I obtain the Iphone4. In addition, I recently transitioned to Apple products; therefore the Iphone will be compatible with the technology I recently incorporated. The marginal cost is that the amount of money invested in the new Iphone $250 plus the penalty paid to change carrier $130 = $380 is less than the monthly bill if I continue with Verizon for six more months.

What incentives could have led you to make a different decision? I was driven by Apple products for the last two years. I first started with the Ipod building my music library. Then I bought an Apple laptop and learned how friendly and practical are all the tools. Finally, I read the rankings about Iphone4 and made an educated decision when it was the time to invest in this new cellphone. Explain how the principles of economics relate to decision-making, interacting, and the working of the economy as a whole

In the example provided above, it took me two years to obtain the Iphone 4 because I utilized the the principles of economics related to decision-making. I had to be rational to understand the reasons why I wanted to transition from Black Berry to Iphone. I waited for two years until the economic incentive was applicable to move forward. Finally, the decision was made at the margin; meaning the marginal benefit equals marginal cost. Briefly describe the main attributes of the following economic systems:

Market Economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources Centrally Planned Economy: An economy in which the government decides how economic resources will be allocated Mixed Economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. Explain how economic interactions are affected by the type of economic system present

Economics is the study of rational choice under scarcity. This statement means that consumers have an opportunity cost in order to obtain a desirable goal. Example: Give up playing time in order to obtain a formal education. The United States is ruled under a mixed economy, which means the government plays a significant role in the allocation of resources. Even though Economics is not the study of money, this example refers how the scarcity of money determines what choices a consumer makes. Also, how the government allocates resources from the taxes collected form consumers.

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