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We therefore have that the average products, AP, for labor and capital, respectively, are ­ °° APL ® ° AP °¯ K q L q K The marginal product, MP, is how much extra quantity that can be produced if one increases the amount of either labor or capital with one unit, keeping the other one constant: ­ °°MPL ® °MP °¯ K Average product: The quantity of goods that, on average, is produced per hour worked or per unit of capital. 'q 'L 'q 'K Marginal product: How much the quantity produced increses if either labor or capital is increased by one unit.

This effect is called the substitution effect. The purchasing power of the consumer becomes larger because of the drop in the price. She can now buy as much as she did before the price changed, and still have money left. That extra money she can spend on both good 1 and on good 2. This is called the income effect. Substitution effect: The effect on demand that depends of the change in relative prices. Income effect: The effect on demand that depends on the fact that one can afford more after a drop in the price, and vice versa.

Risk averse: An agent who dislikes risk. 1 again. e. a risk averse person) prefers not to participate in the lottery. One may then ask which level of certain wealth she would value as much as participating in the lottery. 6 (point c). The question is then which wealth would give her that same utility. 6. 6. 6 is then said to be certainty equivalent to participating in this lottery. Certainty equivalent: The amount of wealth an agent has the same utility of as another uncertain amount of wealth.

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