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ec - Econ Review Exam 3 Chapter 7 Real Income=...

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Econ Review Exam 3 Chapter 7 Real Income = income*quantity, the amount of items you can buy with your income Relative Price = price of one good over another (p1/p2) Marginal Utility - The change in total utility due to a one-unit change in the quantity of a good or service consumed MU= Total Utility - total benefit a person gets from the consumption of goods TU= Summation of all the Utility Law of Diminishing Returns - The principle that as more of any good or service is consumed, its extra benefit declines. Consumer Optimum between 2 Goods and their respective Prices -A choice of a set of goods and services that maximizes utility (level of satisfaction) for each consumer, subject to limited income and price Apply Cost/Benefit Formula for Consumer Optimum Mu(a)/P(a) = Mu(b)/P(b) How Income & Substitution Effects Affect Consumer Optimum Income Effects - a change in income changes where the consumer optimum is. With a larger income, the consumer will always buy more of a normal good, and less of an inferior good utility wise. Substitution Effects - you may sometimes buy substitute goods if they are cheaper, therefore you will get a greater utility from it Chapter 9 Normal Profit- the return one makes on an investment, (accounting profit) Economic Profit - normal profit + opportunity cost 5 Decisions a Firm Makes 1. What goods and services to produce and in what quantities 2. How to produce- the production technology to use 3. How to organize and compensate its managers and workers 4. How to market and price its products 5. What to produce itself and what to buy from other firms.
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