Principal of Rational Choice Takes Into Account Essay

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principal of rational choice takes into account the concept of choice and opportunity cost, brought about by the scarcity of economic resources. It assumes that individuals would always prefer that alternative that yields the highest utility. The theory of rationality has three basic underlying properties: completeness, transitivity, and continuity.

The completeness principal holds that, an individual would always strictly prefer one alternative to another, unless the two alternatives yield equal benefits. In the words of Nicholson and Synder (2012), "faced with two alternatives A and B, an individual can always specify one of three alternatives: either 'A is preferred to B', 'B is preferred to A' or 'A and B. are equally attractive'" (p.89). Transitivity seeks to ensure consistency in decision making, such that, if a given alternative (say alternative X) is preferred to some other alternative (perhaps alternative Y), and Y is of greater significance than yet another alternative (i.e. alternative Z), then alternative X should ordinarily (and perhaps strictly) be preferred to Z (Nicholson & Synder, 2012). The concept of continuity, as explained by Nicholson and Synder (2012), holds that "if an alternative A is preferred to B, then situations suitably 'close to' A must also be preferred to B" (p.89).

Question Two

The law of demand in basic terms refers to or is used in reference to the inverse relationship between the quantity demanded and the price of a commodity. The concept of diminishing marginal utility has been put forward as one of the causes of the downward sloping nature of the demand curve. According to the law of diminishing marginal utility, as more and more quantities of a commodity are consumed, the utility derived from the consumption of each additional unit declines (Baumol & Blinder, 2011). Marginal utility, in monetary terms, refers to the additional amount that a consumer is willing to part with in order to purchase an additional unit of a commodity.

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It is important to note, at this point, that optimum purchases are made at the point where price equals marginal utility (Baumol & Blinder, 2011). When price falls, a rational consumer would maximize his/her utility by increasing the quantity purchased "to that point where the marginal utility equals the lower price" (Baumol & Blinder, 2011, p.91). The concept of diminishing marginal utility, therefore, explains the negative sloping nature of the demand curve.

Question Three

Total utility, in the words of Baumol and Blinder (2011), "is measured by the total amount of money that a consumer would give up to obtain a good" (p.99). The principle of rationality asserts that consumers always aim at maximizing their total utility. Marginal utility, on the other hand, refers to "the maximum amount that a consumer is willing to pay for an additional unit of a commodity" (Baumol & Blinder, 2011, p.99). Total utility increases with increasing consumption, up to a certain point, beyond which it begins to decline, whereas marginal utility diminishes from the start (the concept of diminishing marginal utility).

Question Four

Double- Decker tacos (P=$1)

Chicken Burrito Supremes (P=$2)

Q

TU

MU

MU/P

Q

TU

MU

MU/P

0

0

0

0

1

20

20

20

1

28

28

14

2

34

14

14

2

46

18

9

3

44

10

10

3

54

8

4

4

48

4

4

4

56

2

1

5

48

0

0

5

56

0

0

6

42

-6

-6

6

52

-4

-2

Like I mentioned earlier on in this text, optimal purchases are made at the point where price equals marginal utility (when MU/P=1). 6 tacos and 2 burritos would not be the utility maximizing combination since at these quantities; MU does not equal the prices. The utility maximizing combination would comprise of 4 burritos and 2 tacos.

Question Five

Marginal product refers to the change in.....

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