CBA-2.A—a. Define the key assumptions of consumer choice theory. b. Explain (using a table or graph as appropriate) how a rational…

a. Define the key assumptions of consumer choice theory. b. Explain (using a table or graph as appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs. c. Calculate (using a table or a graph when appropriate) how a rational consumer’s decision making involves the use of marginal benefits and marginal costs.

• Consumers face constraints and have to make optimal decisions accounting for these constraints.
• In a model of rational consumer choice, consumers are assumed to make choices so as to maximize their total utility.
• Consumers experience diminishing marginal utility in the consumption of goods and services.
• Consumers allocate their limited income to purchase the combination of goods that maximizes their utility by equating/comparing the marginal utility of the last dollar spent on each good. Exclusion: Indifference curves are beyond the scope of the course and the AP Exam, but equating the ratios of marginal utility to price is within the scope.
• Enduring understanding CBA-2: To determine the optimal level at which to pursue an activity whose total benefits exceed total cost, rational economic agents compare marginal benefits and marginal costs.