33

Is it simply for saving warehouse costs? Probably yes, holding onto inventory is very expensive. You have to pay for warehousing of the good, it takes the spot of some other inventory that might be in high demand. Food is also perishable so it cannot be stored indefinitely. Stores have to always guess what demand for their products will be, sometimes they ...


29

prices should have already been set to maximize the trade off between profit-per-sale and volume sold But profit-per-sale depends on costs, which depends on the theft numbers, so if theft increases, the equation changes.


28

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 tickets, and that if enough people came to prefer them, demand for regularly priced tickets would fall and the airlines would lose revenue. In other words, ...


20

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, I used to frequently fly to Vienna Schwechat airport, and there used to be a window where you could get cheap tourist flight but the catch was you could not ...


19

What you're describing is retail shrink. It is taken into consideration when setting prices. A business will typically have consultants come in, measure their shrink to be X percent, and prices will be adjusted accordingly. Back when I worked in retail, there was a big printout in the break room informing everyone on shrink. The 5 kinds of shrink outlined on ...


14

It's not about saving warehousing cost. They can't sell 12 months old Christmas chocolate next year, so they have to sell it in the next few months. Their options are to either sell it to customers, sell it to a business, or pay to throw it away. The price indicates that they think selling it very cheaply to customers is the most profitable option, all ...


13

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 some gadget on discount on Amazon. Few customers can make such last-minute decisions. They usually need that flight, but also a flight back, and the schedules ...


12

On most fundamental level it is because interest rate is price for money. In the same way as price of milk goes down when supply of milk increases (ceteris paribus) price of money goes down when supply of money increases. For example, consider the following diagram from Blanchard et al. Macroeconomics below. You have supply of money (by central bank) and ...


10

It is the first one, $TC(0) = FC$. This is the definition. Also consider that it is not clear what is "transformed by $q$ in some way". In case of $$ \frac{5q}{q+1} + \frac{5}{q+1} $$ are the two fractions transformed by $q$, or should I just sum them up to 5? With your function, one can rearrange it to $$ TC(q) = \frac{5}{q+1} + 5 + 5q + q^2 = -\frac{5q}{...


10

The minimization problem $$\min_{w(\cdot)} \int^{\pi_{max}}_{\pi_{min}}w(\pi)f(\pi|e)d\pi$$ s.t $$\int^{\pi_{max}}_{\pi_{min}}v(w(\pi))f(\pi|e)d\pi-g(e) = \bar{u},$$ is evidently an infinite dimensional optimization problem. The FOC, a la Lagrange, comes from standard consideration for such problems. To make this more explicit, define the objective and ...


9

Price is set by the competition In general, the prices are set by the supply and demand for the whole market. If a merchant sells the same goods for a higher price than competitors without a corresponding advantage (location, better service, convenience) then people won't buy these goods and the merchant will earn less profit as the decrease in volume will ...


9

$p\cdot z(p)$ is total revenue (price times quantity), and so its derivative $\frac{\mathrm d}{\mathrm dp}pz(p)=pz'(p)+z(p)$ is marginal revenue.


9

For taking a derivative under the integral, I find it helpful to consider the discrete analog, i.e. taking a derivative under summation. Instead of having $\pi\in[\pi_{min},\pi_{max}]$, suppose $\pi$ takes value from a discrete set $\{\pi_1,\pi_2,\dots,\pi_n\}$. Then the problem becomes \begin{equation} \min_{w(\pi_i)}\sum_{i=1}^nw(\pi_i)f(\pi_i|e)\quad\text{...


8

If in equilibrium, a player "chooses a mixed strategy" that plays $H$ and $T$ with positive probability, $H$, and $T$ must be both optimal choices. It is a standard result that for a (subjective or objective) expected utility maximizer, randomizing can only be optimal if it is over pure optimal choices. This is a direct consequence of expected ...


8

The answer by user Herr K. is very sensible and in fact is what MWG p. 481 footnote 6 suggest to do in order to obtain the f.o.c. But this approach begs the question: Then why on earth did we use the integrals in the first place, only to abandon them for the discrete formulation? If our problem is formulated in terms of continuous profits, then profits are a ...


8

(i) Is not complete. For instance, (10,5) is not $\succeq$ (9,6), because $10>9$, but $5<6$. However, (9,6) is also not $\succeq$ (10,5) for the same reason. Hence, there exists a pair of bundles $A,B$ such that neither $A\succeq B$ nor $B \succeq A$. Thus, it is not rational. (ii) and (iii) are both rational. You can either see this by showing ...


8

Since the exponents add to one the production function has constant returns to scale, which means that, given factor prices, total cost is linear, which means that it's derivative (= marginal cost) is contant. If you change the exponent 1-alpha to beta where alpha+beta < 1, there will be decreasing returns to scale (but still homotheticity) and you will ...


7

It depends actually a non-congested road can be considered non-rivalrous as when you drive there you don’t really reduce the enjoyment or marginal utility of other people driving them. However, once the road is congested it becomes rivalrous. Also note that even though many textbooks include public roads as public goods this is actually not technically ...


7

This is because we are talking about economic profit not accounting profit. An economic profit takes into account opportunity cost. If you are skilled programmer that can earn $\\\$100000$ per year being employed at Google then doing something else like operating your own business incurs an opportunity cost of $\\\$100000$ per year. Hence in this situation ...


7

To elaborate a bit on the answer by user 1muflon1, in economics the word "profit" is the surplus accrued to the firm after we have subtracted from revenues all compensation of production inputs, irrespective of whether these compensations have been recorded by Accounting as expenses or not. Two examples: Suppose you run your own business, and you ...


7

If you start out with €0, then the certainty equivalent of losing €2.5 with probability 1 is -€2.5. Your exercise basically asks you to calculate what difference winning the lottery with a small probability makes. Given this utility function, not much.


7

To understand the CES utility functions, which I guess is your question, a good starting point is the Wikipedia page on constant elasticity of substitution. In particular, The CES aggregator is also sometimes called the Armington aggregator, which was discussed by Armington (1969). Then, the CES utility function was popularized by Dixit and Stiglitz (1977) ...


7

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 later time. If there aren't enough people who would have any interest in a particular flight to fill it even if tickets were only \$1 each, but the number of ...


7

In economics Too Big To Fail (TBTF) can have slightly different meaning depending on what research you are looking at but generally speaking literature seems to agree that what matters is how interconnected or systemically important firm is (e.g. see Bernanke 2010; Zhou, 2009). Systemically important firms are such that other firms critically depend on them....


7

Let $z_1$ and $z_2$ be $\geq 0$ and solution to $$\min_z \{w^\top z\lvert f(z)\geq q\}$$ then clearly $f(z_1)\geq q$ and $f(z_2)\geq q$ and since $\{z\geq 0\lvert f(z)\geq z \}$ is convex it then follows that $z_3 := \lambda z_1 + (1-\lambda)z_2$ must satisfy the constraint $f(z_3)\geq q$. Since $z_1$ and $z_2$ are both minimizers it cannot be the case that $...


7

Imagine that you are a dictator in Sausageland. Your legitimicay depends on you delevering sausages to the inhabitants. Each inhabitant must be given 1 sausage and there are $y$ inhabitants. To produce sausages you command two factories: One factory produces $x_1$ vegan sausages using $x_1$ cabbage heads the other factory produces $x_2$ pork sausages using $...


7

the equilibria of the game in which the strategies of users who face the same reward and costs (i.e. same type) are the same. This sounds like an ex ante (or ex interim or ex post) symmetric equilibrium, depending on the timing of the realization of the types. If both dimensions of the types are realized at the beginning of the game, then I'd go with the ...


7

No function that is homogeneous of degree one, is at the same time strictly concave in its arguments. If the function is differentiable (or non-differentiable at a finite number of points), then the Hessian of a linear homogeneous function is singular. So if you want to end up with a unit cost function that is strictly concave, you have to drop at the same ...


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