Rational Decisions

Individuals, businesses, and the government make a rational decision whenever the marginal benefits are greater than or equal to the marginal costs. In Economics, marginal means additional so a marginal benefit is the additional satisfaction someone gets from an action, while the marginal cost is the additional amount someone pays for something.

A rational decision you might make involves how long you should study for a test. The marginal benefit of studying for one hour is greater than the marginal cost of one hour bingeing Netflix. After studying for three hours (or more), the marginal benefit of studying for one more hour is probably not greater than the cost of sleeping one less hour the night before a big test!

Businesses look at the marginal benefit and marginal cost of each worker. If a worker’s marginal benefit is greater than or equal to the marginal cost, the firm will hire that worker. Once the marginal cost is greater than the marginal benefit, the firm will not hire a worker.

Use the table below to answer the questions.

Worker	Marginal Benefit per hour	Wages per hour
1	$20.00	$15.00
2	$18.00	$15.00
3	$16.00	$15.00
4	$14.00	$15.00

Which workers would the business hire?

Answer: Workers 1, 2 and 3

Which worker would the business not hire?

Answer: Worker 4

Why not?

Answer: The marginal benefit of $14 is less than the marginal cost of $15.

Incentives

Individuals, businesses, and governments respond to incentives in predictable ways. Incentives can be positive or negative. Positive incentives are rewards that encourage you to do something. Winning a big game is the positive incentive to practice every day. Negative incentives are punishments that encourage you to do something. Being grounded encourages you to follow your parents’ rules.

Rational Decision Vocabulary Practice