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Microeconomics

Profit Maximization Rule

The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR. Profit Maximization Rule Formula The profit maximization…
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Introduction to Demand

Demand is defined is the amount of good or service a consumer is willing and able to buy per period of time. It is very important to understand the term "willing and able". Many people want to buy products that they cannot afford at prices they cannot pay. Because they are not able to purchase, there we cannot include them in the demand. The…
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Division of Output between Factories

The division of output between two factories is a case in which you have two factories; an older plant with a higher Marginal Cost and a newer factory with a lower Marginal Cost. To determine how much each factory should produce, you have to draw a horizontal Price/Demand line across the two graphs (of the old and new factory). Where this price…
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The Decoy Effect

The decoy effect or asymmetric dominance effect is the phenomenon whereby consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated. The Decoy Effect An option is asymmetrically dominated when it is inferior in all respects to one option. …
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Decision Fatigue

Decision fatigue refers to the deteriorating quality of decisions made by an individual, after continuously making decisions. Behavioral Economists now understand it as one of the causes of irrational trade-offs in decision-making. Decision fatigue may also lead to consumers making poor choices with their purchases. Effects of Decision…
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The Coase Theorem

The Coase Theorem states "that when there are conflicting property right, bargaining between the parties involved will lead to an efficient outcome regardless of which party is ultimately awarded the property rights, as long as the transaction costs associated with bargaining are negligible." The cost for a lawsuit would be the same for the two…
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