A rational decision maker takes an action if and only if
a. the marginal cost of the action is zero.
b. the marginal cost of the action exceeds the marginal benefit of the action.
c. the opportunity cost of the action is zero.
d. the marginal benefit of the action exceeds the marginal cost of the action.
The Correct Answer and Explanation is:
Correct Answer: d. the marginal benefit of the action exceeds the marginal cost of the action.
Explanation:
In economics, rational decision-making refers to the process by which individuals or entities make choices that maximize their utility or benefit given the constraints they face. A key principle in this framework is the comparison of marginal benefit (MB) and marginal cost (MC). A rational decision maker will take an action if and only if the marginal benefit of that action is greater than or equal to its marginal cost.
Marginal benefit is the additional gain or satisfaction received from consuming or producing one more unit of a good or service. Marginal cost, on the other hand, is the additional cost incurred from consuming or producing that extra unit. The idea is to keep taking actions as long as the extra benefit outweighs the extra cost. Once marginal cost exceeds marginal benefit, continuing the action would reduce overall welfare or profit, and a rational person would stop.
For example, consider a business deciding how many units of a product to produce. If producing one more unit brings in $10 of revenue (marginal benefit) but costs $8 to produce (marginal cost), the business should go ahead with the production. But if the marginal cost rises to $12 while the marginal benefit remains at $10, producing more would reduce profits, and a rational business would not proceed.
This principle applies broadly across economics, from consumer behavior to public policy. It ensures resources are used efficiently and not wasted on actions where the cost outweighs the gain. Therefore, the best economic decisions are those made at the margin, comparing incremental costs and benefits.
Hence, option (d) is the correct choice: a rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost of the action.
