Micro - Rational Decision Making ✔️

Question 1

The underlying assumptions of rational economic decision making

Answer 1

Consumers aim to maximise utility, Firms aim to maximise profits. When building supply and demand models the assumption is made that consumers and producers act in a rational way to maximise their utility.

Question 2

Why Consumers aim to maximise utility

Answer 2

consumers aim to maximise the utility/benefit that they derive from purchasing goods/services. This means that consumers will often consume up to the point where marginal cost = marginal utility.

Question 3

Why Firms aim to maximise profits

Answer 3

producers aim to maximise their profits by producing at a point where the marginal cost = marginal revenue

Question 4

Marginal cost

Answer 4

Marginal cost is also equal to the price that the consumer has to pay for the good/service.