Economics Assignment 1: Opportunity Cost, Rationality, and Behavior

This essay analyzes an article discussing economic concepts, primarily focusing on opportunity cost and rational decision-making. It examines the assumptions underlying economic models and how these models explain consumer and firm behavior. The essay addresses the concept of opportunity cost in the context of decision-making, using the example of Chris deciding between going home to play PlayStation or having another drink. It also discusses the rational behavior model and contrasts it with the behavior of ordinary individuals, particularly in situations involving addictive substances. The essay explores the practical applicability of economic theories and concludes by emphasizing the importance of considering opportunity costs and potential consequences when making decisions, highlighting the differences between the decision-making processes of economists and ordinary individuals. The essay draws upon several economic theories and models to support its arguments and provides relevant references.

Running head: ECONOMICS
Economics
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Introduction
The essay evaluates the article named “Economists discover miracle hangover cure:
drink less”. Different economic concepts discussed in the article are analyzed to address some
specific issues. The article mainly discusses the concept of opportunity cost involved in
rational decision making. People face opportunity cost in their decision making because of
availability of alternative choices related to use of a particular resources (Moulin 2014). Any
economic model is based on some vital assumptions that need to be understood to interpret
the model correctly. The essay addresses specific questions in light of economic theories used
in the article.
Assumption involved in building an economic model
Economists develop different model for a better understanding of behavior of
consumers and firms. The article indicates some assumptions that economists made in
developing their models. One primary assumption of any economic model is that resources
are allocated efficiently as resources are scared as compared to wants that needs to be
fulfilled. It is assumed that people take decisions so that maximum utility can be attained.
One assumption in developing economic model as mentioned in the article is that ordinary
people make rational decision in most cases (Baumol and Blinder 2015). Behavioral
economists in contrast assume that people are emotional and often get attracted towards
unproductive things that influence their decision.
These assumptions are important as it guides decision making process of people
towards a specific direction. Without these assumptions economic model cannot be
developed for explaining behavior of different economic agents. It is important for people to
understand the models developed by economists and the assumptions based on which the
models are developed. Each economic model is abstraction of one or more theories (Jain and

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Ohri 2015). Each of these theories again involve some basic assumption. Without
understanding those assumptions related to economic theories and models, it is not possible
for people to understand the application of the models and its insights.
Opportunity cost of Chris to going home to plan PlayStation
Opportunity cost is the cost of forgoing something to make decision in favor of some
decision. It relates to the cost of sacrificing the next best alternative for making a particular
decision. In the given context of article, the opportunity cost of Chris of going home to plan
PlayStation is the pleasure for having another drink at the pub (Kreps 2019). If Chris decides
to go home and plan a PlayStation then he has to leave the pub leaving the last drink. This
therefore is Chris’s opportunity cost of going home and planning for a PlayStation.
Model of rational behavior
The journalist of the article suggests some economic reasons for supporting the claim
that ‘Hangovers are only possible because ordinary humans often do not fit the model of
rational individuals prescribed by economists.’ The reasons given as discussed in the article
are given as follows.
First, it is not possible for a normal human to understand the consequences of every action
like an economist does. Anyone having experience of drinking alcohol on an empty stomach
after a spending a stressful week knows that the consequence of drinking alcohol can vary.
Second, ordinary humans do not compute the opportunity involved in the decision of drinking
alcohol. People normally think in a simplistic way like whether to drink or not ignoring the
alternative choices.
Third, the way of decision making of an economist is rarely the same as the ordinary
individual. Addiction in most cases outweighs careful consideration.

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The reasons discussed in the article is not necessarily true in every cases. It is particularly
relevant for consumption of addictive items such as alcohol. In case of consumption of such
items the process of rational decision making does not hold (Cowell 2015). This type of
behavior is explained by concepts of behavioral economics.
Decision making of rational individual
Rational individual takes their decision after considering all the available preferences.
They have the knowledge regarding consequences of all the actions they take. They are in a
position to evaluate all the benefits and costs associated with individual decision (Cowen and
Tabarrok 2015). The cost and benefit equation not only include upfront costs but also include
opportunity cost involved in the decision making. This opportunity cost arises from not
choosing the most pleasurable option available to the individual. An example of decision
making of an individual as discussed in the article is the decision making of Chris. The
upfront cost of Chris for another glass of beer is the cost of beer and experience the
displeasure of hang over for the next day. The opportunity cost of consuming another glass of
beer include forgone enjoyment from stamp collection and pleasure from playing PlayStation
(Nicholson and Snyder 2014). Rational consumers take decision in favor a choice when
additional benefit from any choice exceeds the additional cost of the choice.
Practical applicability of the article
Yes, the article explains a case of ‘It might work in theory, but it doesn’t work in
practice’, The article models behaviour of Chris who is an economists using a rational choice
model. Chris chose to do some productive work instead of taking another beer and spending
more time in pub. In making this decision Chris considers the opportunity costs for having
more drinks which is not generally the case of for a common people (Pindyck and Rubinfeld

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2014). In real world, while making such decisions people do not consider the opportunity cost
involved and chose to drink more in contrast to the behaviour of an economist.
Conclusion
In order to get optimum output, consumers need to focus on maximizing level of
satisfaction. Consumer should consider the opportunity cost related to the consumption of a
good. People should think about the consequences related to consumption of a specific good.
The maturity level of a consumer plays an important role in the selection process. The
decision making process of an economist is different from that of an ordinary person. People
in most cases though behave rationally but there are situations where people are unable to
make rational decision. This is the reason why people in practical world end up at choosing to
drink more and suffer hangover as against some better ways of spending leisure time.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Jain, T.R. and Ohri, V.K., 2015. Principal of Microeconomics. FK Publications.
Kreps, D.M., 2019. Microeconomics for managers. Princeton University Press.
Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction (Vol. 313).
Princeton University Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Nelson Education.
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics GE. Pearson Australia Pty Limited.