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In this section of the course we talk about how firms combine inputs to produce goods. All firms have access to the same factors of production. What accounts for the difference in performance among firms? What is the role of the entrepreneur? Are they just another factor of production? Please comment.

2: Principle of diminishing Marginal utility. (Chapter 10)

Consider the following lottery:

Lottery

Bad Economy

Prob. = .50

Good Economy

Prob. = .50

A

1000

3000

B

0

4000

If you choose A and the economy is bad, you get 1000. If you choose A and the economy is good you get3000. If you choose B and the economy is bad you get zero. If you choose B and the economy is good you get 4000. Good or bad are equally likely.

The expected value in both cases is 2000.

  • Are you indifferent between the two?
  • What is the actual trade-off?
  • Under what conditions will you make the trade-off?