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

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Introduction

Explain what is implied by the assumption that decision-makers are rational? 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. ...read more.

Middle

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 robbed them of the power of 'rational' thought. The same can be said of other conditions such as stress and being in love. In terms of decision-makers, rational decision making operates where "a decider in an environment must choose among alternative courses of action, each leading to a different expected environmental outcome, where some outcomes are preferred over others, based on the objectives of the decider. The decider must be able to predict significant properties of expected outcomes based upon some rational understanding of cause and effect in the given environment." We use 'outcome' to mean the particular 'environment state' that follows a given choice. In this situation, the elements of rational decision making can be thought to be: * Alternatives (X). A set of alternative courses of action, each leading to an expected actual outcome, e.g. to open a branch in Tokyo or not. ...read more.

Conclusion

* The consumer's income * The prices which goods can be bought * The consumers tastes or preferences * The behavioural assumption that consumers do the best they can for themselves. They try and maximise their own utility Points 1 and 2 can define the consumer's 'budget constraint'. This describes the different bundles of goods that the consumer can afford or are feasible. The budget constraint shows the maximum affordable quantity of one good given the quantity of the other good being purchased. Therefore there will be what we call a 'trade off' between the 2 goods. So higher quantities of one good will require lower quantities of the other. This is due to the budget constraint which shows how much one good must be sacrificed to obtain larger quantities of the other good. This trade off means the consumer has to 'choose between' them. Graphically the budget constraint is shown as a 'budget line' so when plotted the points will be on the maximum combinations of the 2 goods for a given income and the prevailing prices. It basically summarises the market environment (income and prices) of the consumer. ...read more.

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