How does utility maximization relate to the concept of trade-offs and scarcity?

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Expert Solution

A fundamental concept in economics is that of scarcity. In contrast to its colloquial usage, scarcity in economics connotes not that something is nearly impossible to find, but simply that it is not unlimited. Since resources tend to be scarce, anyone that uses the resource has to make a decision about how to use it.

Since consumers’ resources such as time, attention, and money are limited, they must choose how to best allocate them by making tradeoffs.

The concept of trade-offs due to scarcity is formalized by the concept of opportunity cost. The opportunity cost of a choice is the value of the best alternative forgone. Rational individuals will try to minimize their opportunity costs. By doing so, individuals are maximizing the amount that they can get out of their resources (time, money, effort, etc.). This makes sense: individuals should seek to get the most and give up the least.

Individuals will choose the option that yields the greatest net marginal benefit.

Rahul Sunny answered 11 months ago

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