rational choice theory
people = Rational agents
Seemingly irrational - rational
why do cars check lights - not real errors (car manufacturer = is the one who fixes it)
Try to think of economic events as this model/framework
In economics we assume people are rational so we can analyze them however we have to
justify that.
People maximize their profit.
When answering a question, start from an assumption you learnt from the class then carry on.
(People try to maximize their profit so the manufacturer would make the check lights faulty)
price is not the result but a signal of the process (don't start with price)
Benefit of an action >= cost of the action
demand
supply (cost you are paying someone is the supply)
FRAME EVERYTHING ON RATIONAL CHOICE THEORY - COSTS AND BENEFITS
IN ECONOMICS WE CARE ABOUT:
NO sunk cost
YES opportunity cost
PRACTICE QUESTIONS
#1
important to who - i might get more benefit from talking about minimum wage as i am a worker
that earns minimum wage.
benefits>costs , cost of talking: for minimum wage i have more information accessible (reading
the newspaper etc.) but a minimum wage subsidy requires more work to get a knowledge of)
people (still rational) who are not economists have preferences that might not make the most
economical sense
talking the unimportant stuff (popular) its benefit-cost is more than talking the important stuff.
e.g. how to prevent an asteroid hitting the earth - (the cost of knowing this stuff is very high as
you need advanced knowledge)
MONDAY REVIEW SESSION:
Problem Set 63:It becomes cheaper to sell lower quality wine because the shipping cost
decreased
65: If you go to San Francisco and you live in Buffalo higher cost
your price of housing and food here really doesn't capture the whole thing because you would
eat at home
67: sunk cost, latter is the better option because if you drive all the way there you might as well
be as productive as you can.
43: Rationality is subjective because he thinks economically about benefits and costs. For
example, when you do something that is bad in the long run, at that moment you might consider
that thinking about long term effects is more costly than getting that instant gratification from
whatever you are doing.
// Probably, you can find rationality in anything you do.
1:
9: adversity score is if you get a higher sat score from a poorer area it shows in your transcript.
So what would parents do in this case? they might move to poorer areas or find a way to make
their kids appear liek they took it in those areas.7
tailpipe problem: we will do these things to make driving less damaging to the environment but
end up doing more pollution
where every single car had something to make them more gas efficient. so less gas per mile so
you drive more.
WEDNESDAY REVIEW SESSION
XBOX paid developers money for them to make the games and the other side consumers
paying for the games.
cost benefit analysis:
no cash left on the table mean: if you solved for equilibrium but there is still stuff left for any of
your agents
Taylor Swift is the supply - she cares about fans coming to the show, making money
Fans are the consumers
If she gave $500 + concert = 0
That means that the benefit of the concert is negative, and people hate her show
In that case she only cares about the number of people at her concerts because she is a
billionaire, and the fans hate her shows.
In case of a college, the student may hate college because of the opportunity cost
Think if the college becomes a prison
Maybe there is a world that college graduates don’t make 70% instead 5%
Agents have goals, if their only goal is to make money (the experience, network etc. is not that
important) the costs would outweigh the benefits.