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The Central Economic Problem
Quick questions on Rational decision-making and marginal analysis explained: H2 Economics
6short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is thinking at the margin?Show answer
The word marginal means "one more unit". Rational agents do not decide all-or-nothing; they ask whether the next unit is worth it.
What is diminishing marginal benefit?Show answer
For most activities, marginal benefit falls as you do more: the first slice of pizza is worth more than the fifth. Marginal cost often rises as you do more. Plotting a downward-sloping MB curve and an upward-sloping MC curve, the optimal quantity is where they cross.
What is sunk costs are irrelevant?Show answer
A sunk cost is a cost already incurred that cannot be recovered. Because it is the same whatever is chosen now, it does not affect the marginal comparison and a rational agent ignores it. Continuing a failing project just because money has already been spent is the sunk-cost fallacy.
What is q1?Show answer
State the rule a rational agent uses to decide how much of an activity to do. [2 marks]
What is q2?Show answer
Explain why a rational firm ignores a sunk cost. [3 marks]
What is q3?Show answer
A consumer's marginal utility from drinks falls with each one. Explain how they decide how many to buy. [2 marks]
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