Question

Explain and critically evaluate the fundamental principle of individual rationality and optimizing behavior based on your understanding and your readings.

Answer 1

PRINCIPLE OF INDIVIDUAL RATIONALITY-

It is an economic principle which states that individuals always make prudent and logical choice. Such choices provide them with the greatest benefits ( satisfaction).

The theory assumes that consumers try to maximize their advantage and therefore consistently try to miniy their losses.

Rationality is widely used as an assumption of the behavior of individuals in micro economics.

PRINCIPLE OF OPTIMIZING BEHAVIOR-

There are two types economic agents:

1. Producer

2. Consumer

The main aim behind the activities of these agents is to maximize profit.

For consumers or households, the purpose is to maximize satisfaction ( utility)

Consumer allocate their income in such a way so that they can achieve maximum satisfaction from consumption of goods and services purchased at prevailing market price.