Principles of Individual Decision Making

Topics: Economics, Economic system, Planned economy Pages: 3 (623 words) Published: August 29, 2011
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...
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