126 Decision Making
126.003 Decision Making - Rational Decisions

Rational Decisions

Optimal decision making by rational agents involves the simple equation:
$$ Benefits - Costs $$
- Costs can be broken down into two different types:
- Explicit - an explicit price associated with it
- Implicit - e.g. Opportunity Cost (the cost of the next best alternative)

E.g. the cost of going to a movie is not just the explicit cost of purchasing a movie ticket for $10. If you are giving up working at a $30/hr job for 3-hours, the implicit cost is an extra $90. Total cost of going to the movie is $100.

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