Which concept is most useful for making rational choices in response to incentives?

• A. Random selection
• B. Ignoring opportunity cost
• C. Marginal analysis
• D. Sunk cost fallacy

Answer: (C)

Verified step by step guidance

1. Understand that making rational choices in economics involves comparing the additional benefits and additional costs of a decision.
2. Recognize that 'Marginal analysis' is the process of examining the effects of small changes in behavior or decisions, focusing on the marginal (extra) benefits and marginal costs.
3. Recall that 'Random selection' does not involve systematic evaluation of costs and benefits, so it is not useful for rational decision-making.
4. Note that 'Ignoring opportunity cost' leads to poor decisions because opportunity cost represents the value of the next best alternative foregone.
5. Understand that the 'Sunk cost fallacy' involves considering costs that cannot be recovered, which should be ignored in rational decision-making, unlike marginal analysis which focuses on relevant incremental changes.