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EC 203 (9)

Rationality and the Consumer and Cost-benefit

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Emerson College
Economics (EC)
EC 203

HW review Economists assume people make decisions based on goals. Laisse faire--hands off,the govt will try its best to keep off of economic affairs Varian "theory allows us to interpolate from what we observe to what we don't observe." Naive empiricism can only predict what has happened in the past.It is the theory--the underlying model--that allows us to extrapolate. Economists assume that we optimize--making the best possible decision Consumers maximize utility--well being,happiness,satisfaction Utility is measured indirectly with willingness to pay,not utiles Willingness to pay--how much would you pay without knowing what these things are worth and what is it worth doing/time spending?VS.price!! Slovic (1995) The first formal economic theories assumed that decision makers are - completely informed about the possible courses of action and their consequences - infinitely sensitive to difference among alternatives - rational in the sense that they can rank other the possible choice and make decisions that maximize some subjective measure of value or welfare--usually designated by the term utility "You must not impute your own value systems or standards of rationality to others,and assume that they would act as you would in that situation." Dixit and Skeath Saying someone is stupid because they're doing something you don't like is wrong.They probably have a reason for doing it.Assume there is some rationale behind it Utility function U(x) there is some functional form of utility over consumption.A mathematical relationship U(x)=x+P(x) Consumer
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