Question

The theory of rational behavior a. is an assumption that economists make to have a useful model for how decisions are made. b. assumes that people will behave in the best interest of society as a whole. c. implies that people will always take the time to make perfectly informed decisions. A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mortgage of $3000/month must be paid, since it is a sunk cost. If the restaurant operates, costs rise by $4000 per month, but revenue will be only $6000 per month. Until the building can be sold, a. it is best to keep the bed & breakfast operating because it is profitable. b. it is best to ignore sunk cost and keep the bed & breakfast operating. c. it is best to shut down the bed & breakfast since it is taking a loss. The theory of rational behavior a. implies that people will always know exactly what they are buying b. assumes that people will always attempt to act in their own self-interest. c. is an assumption that economists make to have a useful model for how decisions are made A positive statement is a. a value judgement. b. based upon what can be demonstrated to be true. c. can be shown to be correct or incorrect. Normative statements are based upon a. what can be demonstrated to be true. b. value judgements. c. conjecture.

Answer 1

1) The theory of rational behaviour-

assumes that the people will always want to maximize their payoff in any given situation and minimize the losses.The people do so by rationally calculating the payoffs of the alternatives and act with rationality when making a decision.The economists expalin the the social change or the actions by looking at these rational decisions of the individuals for the society as a whole.

Therefore,option (a)

2) According to the profit maximising decision,until the building will be sold as the next best alternative,it is best to

option(b) it is best to ignore sunk cost and keep the bed and breakfast operating.

Since the sunk is the cost which is incurred in the past and cannot be recovered,the operating firm is still able to recover the variable cost therefore it should continue the production.