ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The majority of classical economic theories are based on the assumptions of rational choice theory: individuals make choices that result in the optimal level of benefit or utility for them. Further, people would rather take actions that benefit them versus actions that are neutral or harm them.

Detailed explanation-2: -Decision: A rational decision is made when the marginal (additional) benefit of a choice is greater than or equal to the marginal (additional) cost.

Detailed explanation-3: -Rational actors in the economy will only select a choice if the marginal benefits of it are equal to or greater than the marginal costs of the action. In microeconomics, one benefit a firm receives from selling a product is the revenue (price times the quantity).

Detailed explanation-4: -When the marginal cost exceeds the marginal benefit, they are better off doing less of it. Past costs are called “sunk” costs. The sunk cost fallacy occurs when people fail to recognize that the relevant costs and benefits occur at the margin, which necessarily involves future costs and benefits.

Detailed explanation-5: -In economic terms, a rational decision is made when the marginal benefit of an action is greater than or equal to the marginal cost.