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Sunday, January 24, 2010

Wealth as an example of increasing returns

The value of an asset increases faster than the increase of the asset itself. Computer network is a typical example. Community of practice also is mentioned quite often. Innovative capability increases with the experience of innovating. Adding a complementary asset to the asset portfolio can create benefit similar to increasing returns.

Is wealth an example of IR as well?

The first $20 given to an empty-pocket person creates excitement. The fifth time $20 is given to the same person probably would not create as much excitement as the first time did. This is a typical example of diminishing return of utility in the physical world.

What about"the more you already have, the more you want to have?"

Yes, the more money you have already had, the hungrier you may be for even more money if you believe money makes you happy. That would be increasing return in a different sense.

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