7

Answer to question If we take your assumptions literally, Jim will decide not to enter the widget business. For suppose he did incur the cost of entry and that Mary is selling at price $p_m$. Jim can only sell to consumers if his price $p_j\leq p_m$. The best price for Jim is $p_m-\epsilon$ (where $\epsilon$ is some very small, positive amount). But this ...


6

The Applied Theory of Price by Donald N. McCloskey McCloskey published the book (pdf) for free now. The Chicago school's other economists also published their books on price theory (see Milton Friedman's and George Stigler's).


5

Glenn Ellison's "A model of Add-On Pricing" seems closely related to this issue. He addressed the question 'why don't firms compete more aggressively to attract consumers by lowering the initial price?' The answer that he offers is that doing so induces an adverse selection problem because lowering the advertised price will disproportionately attract "...


5

The graph you've depicted is just very generic supply and demand intersection, under the generic/introductory assumption that an equilibrium price exists. Even at this level of abstraction, the demand curve is perfectly flat for a price taker, so it's not always the case that those two functions (supply or demand) are always a bijection between price and ...


4

Check this paper out: The Value of Time Spent in Price-Comparison Shopping: Survey and Experimental Evidence Author(s): Howard Marmorstein, Dhruv Grewal and Raymond P. H. Fishe Source: Journal of Consumer Research, Vol. 19, No. 1 (Jun., 1992), pp. 52-61 With a bit of hand-waving, you can say that consumers are willing to search as long as value of time &...


4

This strikes me as a straightforward industrial organization anomaly question. Like, why do hot dogs and buns come in different counts to a package or why are the finest apples shipped out of apple producing regions? Gentzkow and Shapiro (2010) that this paradox is only an apparent contradiction. They find slant is mostly a product of readership bias. ...


4

The most comprehensive survey of estimating oil prices is here. There you fund from very complicated models to very simple ones. As the article shows, the ultimate answer depends on whether you are estimating nominal or real price, and short-term or long-term prices. Some simple models to estimate price of oil might be: no-change forecast: if changes in ...


4

The example you've picked is slightly complicated, because I think there are two possible reasons for the difference in price. Both could contribute at the same time, depending on your view of how wood production works in your example. 1. The labour value invested in growing, harvesting and processing better quality wood (prior to furniture manufacture). ...


4

Two very general reasons are: 1) High prices at the beginning target "early adopters" - people that have a higher "willingness to pay" for a new product just to have it first. Early adopters know that they pay more, and they 're ok with it. 2) As regards consumer reaction, it is much better to reduce prices than to increase prices. So sometimes prices are ...


4

In addition to (intertemporal) price discrimination, there's a parallel process of ramping up production. Especially with tech products, they can have bugs at the beginning, even with all the precautions during design/prototyping. So a massive launch at high production volume is more risky. (Lower production volume also implies higher unit price; see ...


4

I want to flesh out the answers from Alecos Papadopoulos and Bill Clark to make sure it's clear why a firm might want to reduce prices over time—known as intertemporal price discrimination. Suppose there are two groups of potential customers: enthusiasts (who love the product) and laymen (who aren't very interested in the product). Enthusiasts are willing ...


3

There’s two prices for a bond: Invoice or dirty price: what you actually pay; and the clean price, which is the dirty price less accrued interest. In market convention, the clean price is the quoted price. Accrued interest starts off at \$0 at a coupon date, and then rises (roughly) linearly each day until it matches the value of a coupon at the coupon ...


3

Yes. For example, in Armstrong (2006), a monopoly platform sets the price for side 1, $p_1$, such that $$\frac{p_1-f_1+n_2\alpha_2}{p_1}=\frac{1}{\eta_1}$$ where $f_1$ is the unit cost on side 1, $n_2$ is the number of consumers on side 2, $\alpha_2$ is the cross-side externality created by each side 1 consumer, and $\eta_1$ is the conditional price ...


2

The effect is called Anchoring. As you also say, it is actually a psychological term, made popular/coined by Kahneman. http://en.wikipedia.org/wiki/Anchoring


2

To use a simple example, assume that consumer $i$ maximizes $$U(x_i,y_i,I_i) = \alpha\ln x_i +(1-\alpha)\ln y_i + (\bar I_i-p_xx_i -p_yy_i)\\ s.t. \bar I_i \geq p_xx_i +p_yy_i$$ In other words, it may spend all his income on the two goods (but not more), or he may keep some for other goods, not modeled here. Due to the inequality in the constraint we need ...


2

Any decent basic introductionary economics textbook will answer that for you. Principles of economics by Mankiw gives some nice intuition. if you a looking for a little more advanced stuff, try Intermediate microeconomics by Varian.


2

In Lemma 1 they say that the support $\left[\underline{p}_t, \bar{p}_t \right]$ is such that $ c < \underline{p}_t $. So even though the support is connected, it does not extend to $c$, hence the $p \to c$ problem never arises.


2

To make it simple: let say your coconuts production is constant over time but the population is growing. It's a constant supply but an increasing demand, resulting in an increase of coconuts price. If the prices were constant, the demand would be higher and thus not fully satisfied.


2

That's a standard case of a Consumer Price subsidy. Its effect will be that of market expansion: higher quantity at higher equilibrium price, irrespective of whether it will be lump-sum (a fixed monetary amount) or a fixed proportion of the price. A) LUMP SUM SUBSIDY Consider a monopolist. The monopoly faces a downward-sloping demand curve, say $$q_d = a ...


2

It seems that some consumers get utility from paying for the good. This isn't always true, and it does seem counter-intuitive at times. In fact, it often seems that consumers get utility from getting a "great deal," and we often hear them brag about their amazing feats of 80% off. In this case, however, for a few different reasons, some consumers get ...


2

The question is not asking what you solved. You literally gave how much income would be needed by buy $90$ bottles at the new price. What the question is asking is basically "calculate the income effect, and add it to the original income, in order to cancel it out". That is, you solved for what he would have bought if there was no income or substitution ...


2

I'll try to fit this in an answer. I think you are confusing nominal and relative value. Inflation means that the 'value' of your money depreciates relative to other things. For example, in the year 2000 I could buy a bread for 1 USD. In the year 2015 I can buy a bread for 2 USD. This means that the dollar lost half of it's value relative to bread. But ...


2

I think your expectation that a "best" formula exists is very unreasonable. There is no "best" car design, there isn't a formula to design the fastest airplane with total weight $x$ and there is no easy formula that will give you the best price in general situations. Sciences have a lot of unsolved optimization problems. Economics, psychology and most ...


2

I know you are at pains to say you are not looking for 'collusion' as an answer, but what you describe sounds very much like tacit collusion. Here's a quote from Competition Policy by Massimo Motta (pp138–140): I briefly characterise the concept of collusion from the point of view of industrial economics. Note that here I will not use the term "collusion" ...


2

It’s a form of price discrimination. Early adopters are willing to pay more, and so the product is launched at a higher price to capture that value. If they launched at the lower price, then early adopters would be paying a lower price than they’d otherwise be willing to pay.


2

The current mainstream theory of value is the subjective theory of value: goods or services have value that people subjectively believe that they have. Rembrandt paintings cost millions because someone subjectively thinks they are worth that much. If there are no market failures the market price captures the subjective value through supply demand ...


1

Your question does not provide enough information for me to walk you through the process step-by-step using your information, but hopefully I can point you in the right direction. You question about Price Elasticity of Demand (usually just called Elasticity of Demand). Elasticity of Demand is used to show how responsive demand is to a change in price. For ...


1

For question 3, I'm sure there are simpler solution than mine. I provide this version for your reference. By definition, \begin{align} \lambda^* &= \frac{\frac{\partial u}{\partial x_1}(x_1^M)}{p_1} = \frac{\left[(x_1^M)^{-\rho}+ w(x_2^M)^{-\rho}\right]^{-\frac{1}{\rho}-1}(x_1^M)^{-(\rho+1)}}{p_1}\\ \\ v(p_1,p_2,m) &= u(x_1^M(p_1,p_2, m), x_2^M(p_1, ...


1

There is a confusion between a "linear relationship between two variables" and an "econometric equation that is linear in the unknown parameters to be estimated". The first has to do with what happens in reality, and it implies that the marginal relation is constant. The second may be obtained even if the actual relation is not linear, but non-linear in ...


1

If the price is higher than the market price it will lead to less people buying gasoline. If the price is lower, more people will buy gasoline. The inverse is true of sellers. In the first case, there will be over supply of gasoline, leading to a growing inventory. In the second case, there will be more buyers than sellers, leading to a shortage.


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