Q 17. Is the economic model of decisio... [FREE SOLUTION]

Chapter 2: Q 17. (page 44)

Is the economic model of decision-making intended as a literal description of how individuals, firms, and the governments actually make decisions?

Short Answer

Expert verified

No, they are supposed to provide a general understanding.

Step by step solution

Step 1. Introduction

The economic models of decision-making assume economic agents such as buyers and sellers to be rational beings who work with the motive of self-interest. So, the buyers operate with the motive of utility maximization, while the sellers want to maximize profits. Government, on the other hand, works with the motive of maximizing social welfare.

Step 2. Explanation

Theories and models in the study of economics are based on certain assumptions. These assumptions are necessary to simplify the complex structure of the economy that exists in the real world. Without such assumptions, understanding the working of the economy would be too difficult.

Similarly, the model of decision-making is based on certain assumptions. Though these assumptions do not apply to the real world, they help in understanding the working of the economy and the process of decision-making to a certain extent.

Step 3. Conclusion

In the real world, consumers do not quantify the level of satisfaction derived from each good. But the assumption of rational choice can act as a guide towards their behavior. So, it can be concluded that decision-making models do not literally describe the behavior of economic agents.