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Explain What Is Implied By The Assumption That Decision Makers Are

1273 words - 5 pages

Explain what is implied by the assumption that decision-makers are

How is the assumption of rationality used in the economic analysis of
individual behaviour?

In many academic disciplines much is spoken about rationality and
rational choices. Economists generally refer to 'rational' choices
and that individuals in economic theory are rational. By rational we
mean people choose options which they perceive to be the best, given
the circumstances they are in. In terms of making rational choices
some of the conceivable options for example of going to work would be:

· Actually going to work.

· Staying at home

· Going out shopping

· Buying a house

· Fly to the moon etc.

But with these choices we face constraints and it is these constraints
that define our 'feasible' options so flying to the moon would not be
a feasible option. Therefore the options we can choose from is called
the 'feasible set' and it is our preferences i.e. our likes and
dislikes and their relative intensity, which determines which feasible
option we choose. When we make a choice it generates 'utility' which
is a measure of the emotional experience associated with the outcome
of a choice so basically the satisfaction from the consumption of a
good. We talk about 'total utility' meaning the total satisfaction a
person gains from all units of a commodity consumed within a time
period. We also use the term 'marginal utility' which is additional
satisfaction gained from consuming one extra unit within a time
period. There is a general model of rational choice where economists
assume that agents such as decision makers will firstly identify a
feasible set of options and then assess the expected utility of each
option and therefore choosing the option which gives the highest
expected utility. Economists assume that agents are 'utility

However the consequences of making a choice that may seem rational is
not always taken into consideration as in many cases the choice taken
may be actually irrational. For example, somebody deciding or not
they should buy a sandwich with limited money, will certainly consider
the immediate satisfaction of their hunger, but it is dependant on the
individual how much importance they would give to the fact that they
wouldn't be able to get the bus back home later that night and would
catch a cold from walking back, resulting in days off work and
subsequent loss of income. It could be said therefore that anyone who
bought the sandwich would be considered 'irrational'. The assumption
that one is always in possession of all their rational senses is a
dangerous one to make. It can hardly be assumed that the decision of
anyone already very drunk on a night out to buy another alcoholic
beverage to be rational .They know that it will result in them being
violently sick and lead to them regretting the purchase in the
morning, yet this does occur as their intoxicated state has...

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