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Chapter 3

01:220:102 Chapter 3: Chapter 3_ Optimization_ Doing the Best You Can


Department
Economic
Course Code
01:220:102
Professor
D.Okada
Chapter
3

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Chapter 3: Optimization: Doing the Best You Can
Key Ideas
- When an economic agent chooses the best feasible option, she is optimizing
- Optimization in levels calculates the total net benefit of different alternatives and then chooses the best alternative
- Optimization in difference 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
- Optimization in levels and optimization in differences give identical answers
3.1 Two Kinds of Optimization: A Matter of Focus
Economists believe that optimization describes most of the choices that people, households, businesses, and
governments make
- Economists don’t always successfully optimize, but economists try to optimize and usually do good with the given
information
- People’s behavior is approximated by optimization
- Optimization implemented using either of two techniques of cost-benefit analysis (both emphasize the concept of net
benefit - benefit minus cost)
- Get same answer for both
1. Optimization in levels calculates the total net benefit of different alternatives, and then chooses the best alternative
2. 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
- Easier and faster because you focus on key differences between options
Example:
- Two bags of candies
- Optimization in levels: calculate the benefit of each bag and chose the best bag (in isolation)
- Optimization in differences: put two bags side by side and highlight similarities and differences (2
bags)
Choice and Consequence: Do People Really Optimize?
- Behavioral economics: identifies specific situations in which people fail to optimize
- Combing economic and psychological theories
- Procrastination/addiction
- People tend to fail as optimizers when they are new at tasks
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