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.
Source:
- https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/basic-economic-concepts/cost-benefit-analysis/v/opportunity-costs
Graph:
- 126.003 Decision Making - Rational Decisions to 126.001 Decision Making - Expected Value
- 126.003 Decision Making - Rational Decisions to 126.004 Decision Making - Accounting Profit vs Economic Profit
- 126 Decision Making to 126.003 Decision Making - Rational Decisions
- 126.001 Decision Making - Expected Value to 126.003 Decision Making - Rational Decisions
- 126.004 Decision Making - Accounting Profit vs Economic Profit to 126.003 Decision Making - Rational Decisions