Chapter 17, Problem 1QR

To determine

Bounded rationality and its relevance in economic modeling.

Explanation of Solution

The economic theory relies up on many assumptions and rules which are very difficult to be implemented in the real society. Thus, testing and studying the theory on a real economy becomes difficult process. This is handled with the help of the economic model which is the representation of the actual economy with the help of a set of variables and set of relations between them.

The bounded rationality on the other hand is the behavior of the economy which says that the people in the economy will never do the actual information gathering and calculations which are said to be happening in the economy. According to the theory, such information gathering and calculations are very important as they helps to make the optimal decisions by the society. The bounded rationality states that people either can’t or won’t do such collection and calculations.

The economic models assume that the people do the gathering and calculation of the available information to make the decisions. Thus, the bounded rationality is an important aspect that the economic model depends up on. Thus, the bounded rationality is relevant in economic modeling.

Economics Concept Introduction

Economic model:  The economic model is a theoretical construct representing the economic process with the help of a set of variables and a set o logical relationships between the variables.