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Effects of a Change in Income on the Opportunity Set If the consumer’s income increases, the consumer can buy more of all goods. A change in income affects only the position and not the slope of the budget line. If Lisa’s income increases and relative prices do not change, her budget line shifts outward (away… Continue reading Effects of a Change in Income on the Opportunity Set

Figure 4.8 Consumer Maximization, Interior Solution Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved Figure 4.9 Consumer Maximization, Corner Solution Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 4.4 Constrained Consumer Choice (3 of 4) Promotions Managers induce consumers to buy more units with promotions. The two most used… Continue reading Consumer Maximization and Interior Solution

4.4 Constrained Consumer Choice (4 of 4) Managerial Implication: Designing Promotions When deciding whether to use a B O G O promotion, a manager should compare the benefit to the cost. For example, offering such a promotion is more likely to raise the hotel’s profit if it has excess capacity, so that the cost of… Continue reading Managerial Implication on Designing Promotions

Deriving an Individual’s Demand Curve Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved 4.6 Behavioral Economics (1 of 3) So far, we have assumed that consumers are rational, maximizing individuals. Behavioral economics adds insights from psychology and empirical research on human cognitive and emotional biases to the rational economic model to better… Continue reading Deriving an Individual’s Demand Curve

Managerial Solution Paying Employees to Relocate How can a manager use consumer theory to optimally compensate employees who are transferred to other cities? Solution Managers collect information about the cost of living in various cities. They know that it is more expensive to buy the same bundle of goods in one city than another and… Continue reading Paying Employees to Relocate

Chapter 3 Empirical Methods for Demand Analysis Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available) 1 Managerial Problem… Continue reading Empirical Methods for Demand Analysis

Downward-Sloping Linear Demand Curves If the shape of the linear demand curve is downward sloping, elasticity varies along the demand curve. The elasticity of demand is a more negative number the higher the price and hence the smaller the quantity. In Figure 3.1, the higher the price, the more elastic the demand curve. A 1%… Continue reading Downward Sloping Linear Demand Curves

Demand Elasticities over Time The shape of a demand curve depends on the time period under consideration. It is easy to substitute between products in the long run but not in the short run. Liddle (2012) estimated gasoline demand elasticities across many countries and found that the short-run elasticity was −0.16, and the long-run elasticity… Continue reading Demand Elasticities over Time

Testing Approach Using the t-statistic The t-statistic equals the estimated coefficient divided by its estimated standard error. That is, the t-statistic measures whether the estimated coefficient is large relative to the standard error. In a large sample, if the t-statistic > 2, we reject the null hypothesis that the proposed explanatory variable has no effect… Continue reading Testing Approach Using the t statistic