Author Question: Why do trade-offs occur? How are budget constraints related to trade-offs? What will be an ideal ... (Read 477 times)

elizabeth18 · **on:** Jun 29, 2018

Why do trade-offs occur? How are budget constraints related to trade-offs?

What will be an ideal response?

Question 2

Which of the following represents the correct formula for present value?

A) Present value = Payment T periods from now (1 + interest rate)T
B) Present value = Payment T periods from now - (1 + interest rate)T
C) Present value = Payment T periods from now + (1 + interest rate)T
D) Present value = Payment T periods from now / (1 + interest rate)T

at · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Trade-offs occur because of scarcity: economic agents need to satisfy their wants with limited resources. Therefore, in most cases, some benefits have to be given up in order to gain some other benefits. Budget constraints quantify the relevant trade-offs that an economic agent faces. Once trade-offs are quantified, rational decision making becomes easier allowing the individual to make an optimal decision.

Answer to Question 2

D