Formal economic theory is based on assumptions such as:

Question

Quizplus · Accepted Answer

Formal economic theory assumes that individuals participating in market exchange are rational actors who seek to maximize their own material well-being and profits. This is known as the principle of self-interest, and it is a key tenet of formal economic theory.

The other answer choices are incorrect because they do not accurately reflect assumptions of formal economic theory. For example, choice A is incorrect because scarcity actually increases the value of a commodity in formal economic theory (i.e. the law of supply and demand). Choice B is incorrect because formal economic theory assumes that individuals are always striving to maximize their material well-being. Choice D is incorrect because formal economic theory assumes that families and individuals are rational actors who seek to maximize their own self-interest, not necessarily compete against each other. Choice E is incorrect because formal economic theory recognizes the importance of non-market activities (such as households and government) that are not determined by the market.

Formal Economic Theory Is Based on Assumptions Such As