ECON-2006EG Study Guide - Quiz Guide: Marginal Utility, Marginal Cost, Market Power
7 Mar 2021
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3. 1 two kinds of optimization: a matter of focus. Economists believe that people always try to choose the optimal option. However, they do not assume that they always succeed to optimize. Optimization in levels calculates the total net benefit of different alternatives and then chooses the best alternative. Optimization in differences calculates the change in net benefits when a person switches from one alternative to another and then uses these marginal comparisons to choose the best alternative. The difference between optimization in levels and optimization in differences is how you set the focus of the decision. If you choose optimally, the progress of choosing should not have an influence on the decision. Often, optimization of differences, is the faster way, because you directly set the focus on the main differences. Behavioral economics jointly analyzes the economic and psychological factors that explain human behavior identifies the specific situations in which people fail to optimize.
