28 votes

What's wrong with the "airline marginal cost pricing" argument?

One possible answer is that Mankiw's argument takes consumer demand for airline tickets as fixed and given. I would speculate that cheap last-minute tickets are a substitute good for regularly priced ...
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  • 605
20 votes

What's wrong with the "airline marginal cost pricing" argument?

Do airlines actually do anything like the above? Yes, in fact now you will see on many airports specialized companies/windows that will offer last-minute flights very cheap. For example, in the past, ...
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13 votes

What's wrong with the "airline marginal cost pricing" argument?

Pricing of last minute tickets for airlines is a tricky problem. Yes, discounting fares may attract customers who would not have flown otherwise. But buying a flight is a bit more complex than buying ...
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  • 402
7 votes
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Homothetic preferences and utility functions

As noted in the comments, it is not true that homothetic preferences must have constant marginal rates of substitution. To see this, recall that preferences given by the utility function $$ u(x,y) = ...
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7 votes

What's wrong with the "airline marginal cost pricing" argument?

One problem with trying to price goods or services at their marginal cost is that customers may hold off on making immediate purchases of goods or services they expect to be available cheaper at a ...
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  • 265
7 votes
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Fundamental question on marginal utility

How is marginal utility interpreted as the additional "happiness" gained from consuming one more unit of some good? Not sure what you mean. Utility is not interpreted as some biological ...
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6 votes
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Can marginal revenue be increasing?

It is perfectly consistent for the marginal revenue to increase in $q$, even if the demand curve decreases. Marginal revenue is $$p(q)+ q p'(q).$$ The first term says "if I sell one extra unit then ...
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  • 16.6k
5 votes
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When can I say that a utility function has constant marginal utility?

Marginal utility (of $x$) in your case is $U_x(x,y)=2xy^2$. You use the sign of the derivative of MU, namely $U_{xx}$, to tell whether MU is increasing, constant, or decreasing. Specifically, you ...
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5 votes
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Is it true that if marginal cost is constant, then average variable cost is also constant and equals marginal cost?

Your intuition is correct. First, you're right that "marginal cost only depends on variable cost", since \begin{equation} MC(q)=\frac{\mathrm dTC(q)}{\mathrm dq}=\frac{\mathrm d(FC+VC(q))}{\...
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5 votes

What's wrong with the "airline marginal cost pricing" argument?

I think the other answers covered well why airlines don't usually do quite what Mankiw described. But everything I have read about airline pricing says they are acutely aware of marginal costs. Even ...
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4 votes
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Understanding the shape of a Marginal Cost Curve

I'll offer a less algebraic alternative to Alecos's answer. In short, yes and no. The "no" part Normally the MC and AC curves would look like the following, with MC intersecting AC from ...
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4 votes

Understanding the shape of a Marginal Cost Curve

You are missing the average cost curve in the same diagram. Basic algebra gives us the following. Let's find the minimum of the $AC = C/Q$. We have $$\frac {\partial AC}{\partial Q} = \frac {MC\...
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4 votes
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How is marginal benefit measured?

The reason why marginal benefit is measured in cans of soda is that this economy only has two goods: pizza and soda. So instead of using money we may as well use soda. Alternatively, in the absence of ...
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4 votes

Is it considered acceptable or unacceptable to use currency as a measure of utility?

Utility functions as ordinarily used are not a measure of well-being comparable among people, but a representation of preferences. Moreover, preferences could principally be elicited from choice ...
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4 votes
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Equivalence of producer surplus areas

The profit of a firm $i$ is given by: $$ \pi_i(p) = p q_i - C_i(q_i) $$ where $p$ is the price, $q$_i is the output of firm $i$ and $C_i(.)$ is the cost function which differs across firms. The first ...
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4 votes
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Demand curve is same as Marginal Benefit curve?

Nuance matters: In the comments under 1muflon1's answer the quote given is The demand curve represents marginal benefit. The vertical distance at each quantity shows the mount consumers are willing ...
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4 votes
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I don't know why these two method yield different solutions for marginal product of labour

I am not sure why you expect method two to work, as generally $$ \frac{\partial F(K,N)}{\partial N} \neq \frac{\partial F(K,N)}{\partial K}\frac{\partial K}{\partial N}. $$ These are partial ...
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4 votes

Is addiction a case of increasing marginal utility?

To expand on @1muflon1's answer. The theory of rational addiction assumes that the utility of a consumer at time instance $t$ depends both on current consumption of the addicitve good, say $c_t$, and ...
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4 votes
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Relationship between capital and decreasing marginal prodcutivity

The claim is not that capital decreases marginal productivity, but that the marginal productivity of capital is decreasing. (See "diminishing returns.") That is, the first "unit" ...
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4 votes

Mathematical explanation of transformations of Marginal Revenue

You have two questions. The first one is (I broke lines in the quotes where I tought this improved legibility): MR = d(Total revenue)/dQuantity = d (Price * Quantity)/dQuanitity This is the same as ...
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3 votes

Understanding the law of supply

As you noted correctly, it has something to do with the costs. An important point here is a cost of producing an additional unit, and not average cost. Let me give the following example. Suppose ...
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  • 257
3 votes

When can I say that a utility function has constant marginal utility?

Marginal utility tells you how the utility changes as you alter x. That is the first derivative, which here is a function of x. This means it is increasing. The rate of that increase is constant as ...
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  • 1,105
3 votes
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fixed an marginal cost calculation issue

The marginal cost is 3. Marginal costs do not depend on the fixed cost, and when your variable costs are constant, then the marginal cost and the variable cost are the same. Note that your total cost ...
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  • 4,158
3 votes

Find Indifference curve/s and Marginal Rate/s of Substitution given only one point

In general, you are right to be mystified: specifying a point (consumption bundle) isn't enough to compute MRS and indifference curves. However, in this problem, I would suggest you take the first ...
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  • 131
3 votes
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Marginal Profit Derivation

The marginal profit you calculate is correct. We can rearrange the solution of the problem you are given. This is equivalent to $$ \frac{dP}{dq} = 192 -176q + 48q^2 -4q^3$$ This derivative has as ...
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  • 8,477
3 votes

What would be the income tax rate be if it were 'flattened'?

Having worked on these issues myself for quite some time, I am not aware of any study on this for New Zealand. For a back-of-the-envelope calculation of the revenue-neutral flat tax rate, you'd need ...
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  • 1,262
3 votes

Piketty's explanation of elasticity of substitution (from his book Capital in the 21st century)

The following is from Thomas Piketty and Gabriel Zucman (2015, From Handbook of Income Distribution, Volume 2, Chapter 15, Part 15.5.3 which is hard to link to directly but get it here): Take a CES ...
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3 votes

Returns to Scale Microeconomics

Seems like the only function $f$ that fits your description $$ \forall i: \frac{\partial f(\mathbf{x})}{\partial x_i} = c_i $$ is $$ f(\mathbf{x}) = A + \sum x_i c_i. $$ (Frequently $f(\mathbf{0}) = 0$...
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3 votes
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Monopoly: Demand Curve and Marginal Revenue Curve Intercepts

Your marginal revenue is not calculated correctly. Marginal revenue $(MR)$ is the derivate of total revenue which is equal price times quantity $TR=PQ$. In your case $TR$ should be: $$TR=(k+aQ)Q \...
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