Lecture Note Microeconomic Theory 1
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Estimating the Benefits of New Products* by W
Estimating the Benefits of New Products* by W. Erwin Diewert University of British Columbia and NBER Robert C. Feenstra University of California, Davis, and NBER January 26, 2021 Abstract A major challenge facing statistical agencies is the problem of adjusting price and quantity indexes for changes in the availability of commodities. This problem arises in the scanner data context as products in a commodity stratum appear and disappear in retail outlets. Hicks suggested a reservation price methodology for dealing with this problem in the context of the economic approach to index number theory. Hausman used a linear approximation to the demand curve to compute the reservation price, while Feenstra used a reservation price of infinity for a CES demand curve, which will lead to higher gains. The present paper evaluates these approaches, comparing the CES gains to those obtained using a quadratic utility function using scanner data on frozen juice products. We find that the CES gains from new frozen juice products are about six times greater than those obtained using the quadratic utility function, and the confidence intervals of these estimates do not overlap. * We thank the organizers and participants at the Big Data for 21st Century Economic Statistics conference, and especially Marshall Reinsdorf and Matthew Shapiro, for their helpful comments. We also thank Ninghui Li for her excellent research assistance. Financial support was received from a Digging into Data multi-country grant, provided by the United States NSF and the Canadian SSHRC. We acknowledge the James A. Kilts Center, University of Chicago Booth School of Business, https://www.chicagobooth.edu/research/kilts/datasets/dominicks, for the use of the Dominick’s Dataset. -
Lecture 4 " Theory of Choice and Individual Demand
Lecture 4 - Theory of Choice and Individual Demand David Autor 14.03 Fall 2004 Agenda 1. Utility maximization 2. Indirect Utility function 3. Application: Gift giving –Waldfogel paper 4. Expenditure function 5. Relationship between Expenditure function and Indirect utility function 6. Demand functions 7. Application: Food stamps –Whitmore paper 8. Income and substitution e¤ects 9. Normal and inferior goods 10. Compensated and uncompensated demand (Hicksian, Marshallian) 11. Application: Gi¤en goods –Jensen and Miller paper Roadmap: 1 Axioms of consumer preference Primal Dual Max U(x,y) Min pxx+ pyy s.t. pxx+ pyy < I s.t. U(x,y) > U Indirect Utility function Expenditure function E*= E(p , p , U) U*= V(px, py, I) x y Marshallian demand Hicksian demand X = d (p , p , I) = x x y X = hx(px, py, U) = (by Roy’s identity) (by Shepard’s lemma) ¶V / ¶p ¶ E - x - ¶V / ¶I Slutsky equation ¶p x 1 Theory of consumer choice 1.1 Utility maximization subject to budget constraint Ingredients: Utility function (preferences) Budget constraint Price vector Consumer’sproblem Maximize utility subjet to budget constraint Characteristics of solution: Budget exhaustion (non-satiation) For most solutions: psychic tradeo¤ = monetary payo¤ Psychic tradeo¤ is MRS Monetary tradeo¤ is the price ratio 2 From a visual point of view utility maximization corresponds to the following point: (Note that the slope of the budget set is equal to px ) py Graph 35 y IC3 IC2 IC1 B C A D x What’swrong with some of these points? We can see that A P B, A I D, C P A. -
2. Budget Constraint.Pdf
Engineering Economic Analysis 2019 SPRING Prof. D. J. LEE, SNU Chap. 2 BUDGET CONSTRAINT Consumption Choice Sets . A consumption choice set, X, is the collection of all consumption choices available to the consumer. n X = R+ . A consumption bundle, x, containing x1 units of commodity 1, x2 units of commodity 2 and so on up to xn units of commodity n is denoted by the vector xx =(1 ,..., xn ) ∈ X n . Commodity price vector pp =(1 ,..., pn ) ∈R+ 1 Budget Constraints . Q: When is a bundle (x1, … , xn) affordable at prices p1, … , pn? • A: When p1x1 + … + pnxn ≤ m where m is the consumer’s (disposable) income. The consumer’s budget set is the set of all affordable bundles; B(p1, … , pn, m) = { (x1, … , xn) | x1 ≥ 0, … , xn ≥ 0 and p1x1 + … + pnxn ≤ m } . The budget constraint is the upper boundary of the budget set. p1x1 + … + pnxn = m 2 Budget Set and Constraint for Two Commodities x2 Budget constraint is m /p2 p1x1 + p2x2 = m. m /p1 x1 3 Budget Set and Constraint for Two Commodities x2 Budget constraint is m /p2 p1x1 + p2x2 = m. the collection of all affordable bundles. Budget p1x1 + p2x2 ≤ m. Set m /p1 x1 4 Budget Constraint for Three Commodities • If n = 3 x2 p1x1 + p2x2 + p3x3 = m m /p2 m /p3 x3 m /p1 x1 5 Budget Set for Three Commodities x 2 { (x1,x2,x3) | x1 ≥ 0, x2 ≥ 0, x3 ≥ 0 and m /p2 p1x1 + p2x2 + p3x3 ≤ m} m /p3 x3 m /p1 x1 6 Opportunity cost in Budget Constraints x2 p1x1 + p2x2 = m Slope is -p1/p2 a2 Opp. -
3 Lecture 3: Choices from Budget Sets
3 Lecture 3: Choices from Budget Sets Up to now, we have been rather demanding about the data that we need in order to test our models. We have made two important assumptions: that we observe choices from all possible choice sets, and that we observe choice correspondences (i.e. we see all the options that a decision maker would be ‘happy with’). In many cases, we may not be so lucky with our data. Unfortunately, without these two properties, conditions and are no longer necessary or sufficient to guarantee a utility representation. Consider the following example of an incomplete data set. Example 1 Let = and say we observe the following (incomplete) choice correspondence { } ( )= { } { } ( )= { } { } ( )= { } { } This choice correspondence satisfies properties and trivially. is satisfied because we do not observe any choices from sets that are subsets of each other. is satisfied because we never see two objects chosen from the same set. However, there is no way that we can rationalize these choices with a complete preference relation. The first observation implies that ,thesecond  that and the third that 3. Thus, any binary relation that would rationalize these choices   would be intransitive. In fact, in order for theorem 1 to hold, we don’t have to observe choices from all subsets of , but we do have to need at least all subsets of that contain two and three elements (you should go back and look at the proof of theorem 1 and check that you agree with this statement). What about if we drop the assumption that we observe a choice correspondence, and instead observe a choice function? For example, we could ask the following question: Question 1 Let :2 ∅ be a choice function. -
EC9D3 Advanced Microeconomics, Part I: Lecture 2
EC9D3 Advanced Microeconomics, Part I: Lecture 2 Francesco Squintani August, 2020 Budget Set Up to now we focused on how to represent the consumer's preferences. We shall now consider the sour note of the constraint that is imposed on such preferences. Definition (Budget Set) The consumer's budget set is: B(p; m) = fx j (p x) ≤ m; x 2 X g Francesco Squintani EC9D3 Advanced Microeconomics, Part I August, 2020 2 / 49 Budget Set (2) 6 x1 2 L = 2 X = R+ c c c c c c c c c c c c B(p; m) c c c c c c c - x2 Francesco Squintani EC9D3 Advanced Microeconomics, Part I August, 2020 3 / 49 Income and Prices The two exogenous variables that characterize the consumer's budget set are: the level of income m the vector of prices p = (p1;:::; pL). Often the budget set is characterized by a level of income represented by the value of the consumer's endowment x0 (labour supply): m = (p x0) Francesco Squintani EC9D3 Advanced Microeconomics, Part I August, 2020 4 / 49 Utility Maximization The basic consumer's problem (with rational, continuous and monotonic preferences): max u(x) fxg s:t: x 2 B(p; m) Result If p > 0 and u(·) is continuous, then the utility maximization problem has a solution. Proof: If p > 0 (i.e. pl > 0, 8l = 1;:::; L) the budget set is compact (closed, bounded) hence by Weierstrass theorem the maximization of a continuous function on a compact set has a solution. Francesco Squintani EC9D3 Advanced Microeconomics, Part I August, 2020 5 / 49 First Order Condition Result If u(·) is continuously differentiable, the solution x∗ = x(p; m) to the consumer's problem is characterized by the following necessary conditions. -
Senior Secondary Course ECONOMICS (318)
Senior Secondary Course ECONOMICS (318) 2 Course Coordinator Dr. Manish Chugh fo|k/kue~ loZ/kua iz/kkue~ NATIONAL INSTITUTE OF OPEN SCHOOLING (An Autonomous Institution under MHRD, Govt. of India) A-24-25, Institutional Area, Sector-62, NOIDA-201309 (U.P.) Website: www.nios.ac.in, Toll Free No. 18001809393 Printed on 60 GSM Paper with NIOS Watermark. © National Institute of Open Schooling May, 2015 (,000 Copies) Published by the Secretary, National Institute of Open Schooling, A-24-25, Institutional Area, Sector-62, Noida and printed at M/s #1PGQHHUGV Printers, 5/3, Kirti Nagar, Industrial Area, New Delhi. ADVISORY COMMITTEE Prof. C.B. Sharma Dr. Kuldeep Agarwal Dr. Rachna Bhatia Chairman Director (Academic) Assistant Director (Academic) NIOS, NOIDA (UP) NIOS, NOIDA (UP) NIOS, NOIDA (UP) CURRICULUM COMMITTEE Dr. O.P. Agarwal Sh. J. Khuntia Dr. Padma Suresh (Former Director of the Eco. Deptt.) Associate Professor (Economics) Associate Professor (Economics) NREC College, Meerut University School of Open Learning Sri Venkateshwara College Khurja (UP) Delhi University, Delhi Delhi University, Delhi Prof. Renu Jatana Sh. H.K. Gupta Sh. A.S. Garg Associate Professor, MLSU, Rtd.PGT, From NCT Rtd.Vice Principal, From NCT Udaipur (Rajasthan) New Delhi. New Delhi. Sh. Ramesh Chandra Dr.Manish Chugh Retd. Reader (Economics) Academic Officer (Economics), NCERT, Delhi. NIOS, NOIDA LESSON WRITERS Sh. J. Khuntia Dr. Anupama Rajput Ms.Sapna Chugh Associate Professor (Eco.), Associate Professor, PGT (Economics) School of Open Learning, Janki Devi Memorial College S.V. Public School, Jaipur Univ. of Delhi Univ. of Delhi Dr. Bhawna Rajput Sh. A.S. Garg Dr. -
A Theoretical Exposition of Consumers' Response To
fite, A THEORETICAL EXPOSITION OF CONSUMERS'RESPONSE TO ALTERNATIVE FOOD POLICIES WAITE LIBRARY DEPT. OF AG & APPLIED ECONOMICS 1994 BUFORD AVE. - 232 COB UNIVERSITY OF MINNESOTA ST. PAUL, MN 55108 U.S.A. DEPARTMENT OF AGRICULTURAL AND RESOURCE ECONOMICS DIVISION OF AGRICULTURE AND NATURAL RESOURCES UNIVERSITY OF CALIFORNIA AT BERKELEY WORKING PAPER NO.615 A THEORETICAL EXPOSITION OF CONSUMERS'RESPONSE TO ALTERNATIVE FOOD POLICIES . by G.Mythili WAITE MEMO s r-- " DEPT. OF AG.AND Avr, 1994 BUFORD Av. UNIVERSITY OF N. ST. PAUL,MN 5C This paper was written while the author was a Ford Foundation Post Doctoral Fellow in the Department of Agricultural and Resource Economics, University of California at Berkeley. The author wishes to thank Brian Wright for his helpful comments and suggestions. California Agricultural Experiment Station Giarmini Foundation ofAgricultural Economics August, 1991 37X -79`i 4L3"/55 (//'--6/5 A THEORETICAL EXPOSITION OF CONSUMERS'RESPONSE TO ALTERNATIVE FOOD POLICIES 1.Introduction &his study is an attempt to relate alternative food subsidy programs with reference to the implication for consumer theories. The Government's goal is set on raising the nutritional standard of those who are underfed rather than redistributional aspects. The rationale for such goal assumes away consumer sovereignty. This study is focussed only on consumer sector and ignores production sector merely to avoid complexities involved in the theoretical formulation, though it is recognized that in. most of the thirdworld countries where a significant proportion of the population live on farming and consume their own produce, the linkage between production and consumption decisions does influence the behavioral pattern of an individual as a consumer. -
6-2: the 2 2 × Exchange Economy
©John Riley 4 May 2007 6-2: THE 2× 2 EXCHANGE ECONOMY In this section we switch the focus from production efficiency to the allocation of goods among consumers. We begin by focusing on a simple exchange economy in which there are two consumers, Alex and Bev. Each consumer has an endowment of two commodities. Commodities are private. That is, each consumer cares only about his own consumption. Consumer h h 2 h h h, h= AB , has an endowment ω , a consumption set X = R+ and a utility function U( x ) that is strictly monotonic. Pareto Efficiency With more than one consumer, the social ranking of allocations requires weighing the utility of one individual against that of another. Suppose that the set of possible utility pairs (the “utility possibility set”) associated with all possible allocations of the two commodities is as depicted below. B U2 45 line A W U+ U = k 1 2 U 1 6.2-1: Utility Possibility Set Setting aside the question of measuring utility, one philosophical approach to social choice places each individual behind a “veil of ignorance.” Not knowing which consumer you are going 1 to be, it is natural to assign a probability of 2 to each possibility. Then if individuals are neutral Section 6.2 page 1 ©John Riley 4 May 2007 towards risk while behind the veil of ignorance, they will prefer allocations with a higher expected utility 1+ 1 2U1 2 U 2 . This is equivalent to maximizing the sum of utilities, a proposal first put forth by Jeremy Bentham. -
The Budget Constraint Consumption Sets N a Consumption Set Is the Collection of All Consumption Choices Available to the Consumer
The Budget Constraint Consumption Sets n A consumption set is the collection of all consumption choices available to the consumer. n What constrains consumption choice? n Budgetary, time and other resource limitations. Budget Constraints n A consumption bundle containing x1 units of commodity 1, x2 units of commodity 2 and so on up to xn units of commodity n is denoted by the vector (x1, x2, … , xn). n Commodity prices are p1, p2, … , pn. Budget Constraints n Q: When is a consumption bundle (x1, … , xn) affordable at given prices p1, … , pn? Budget Constraints n Q: When is a bundle (x1, … , xn) affordable at prices p1, … , pn? n A: When p1x1 + … + pnxn ≤ m where m is the consumer’s (disposable) income. Budget Constraints n The bundles that are only just affordable form the consumer’s budget constraint. This is the set { (x1,…,xn) | x1 ≥ 0, …, xn ≥ 0 and p1x1 + … + pnxn = m }. Budget Constraints n The consumer’s budget set is the set of all affordable bundles; B(p1, … , pn, m) = { (x1, … , xn) | x1 ≥ 0, … , xn ≥ 0 and p1x1 + … + pnxn ≤ m } n The budget constraint is the upper boundary of the budget set. Budget Set and Constraint for x2 Two Commodities Budget constraint is m /p2 p1x1 + p2x2 = m. m /p1 x1 Budget Set and Constraint for x2 Two Commodities Budget constraint is m /p2 p1x1 + p2x2 = m. m /p1 x1 Budget Set and Constraint for x2 Two Commodities Budget constraint is m /p2 p1x1 + p2x2 = m. Just affordable m /p1 x1 Budget Set and Constraint for x2 Two Commodities Budget constraint is m /p2 p1x1 + p2x2 = m. -
Choice Models in Marketing: Economic Assumptions, Challenges and Trends
Foundations and TrendsR in Marketing Vol. 2, No. 2 (2007) 97–184 c 2008 S. R. Chandukala, J. Kim, T. Otter, P. E. Rossi and G. M. Allenby DOI: 10.1561/1700000008 Choice Models in Marketing: Economic Assumptions, Challenges and Trends Sandeep R. Chandukala1, Jaehwan Kim2, Thomas Otter3, Peter E. Rossi4 and Greg M. Allenby5 1 Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA, [email protected] 2 Korea University Business School, Korea University, Korea, [email protected] 3 Department of Marketing, Johann Wolfgang Goethe-Universit¨at Frankfurt, Germany, [email protected] 4 Graduate School of Business, University of Chicago, USA, [email protected] 5 Fisher College of Business, Ohio State University, USA, allenby 1@fisher.osu.edu Abstract Direct utility models of consumer choice are reviewed and developed for understanding consumer preferences. We begin with a review of statistical models of choice, posing a series of modeling challenges that are resolved by considering economic foundations based on con- strained utility maximization. Direct utility models differ from other choice models by directly modeling the consumer utility function used to derive the likelihood of the data through Kuhn-Tucker con- ditions. Recent advances in Bayesian estimation make the estimation of these models computationally feasible, offering advantages in model interpretation over models based on indirect utility, and descriptive models that tend to be highly parameterized. Future trends are dis- cussed in terms of the antecedents and enhancements of utility function specification. 1 Introduction and Scope Understanding and measuring the effects of consumer choice is one of the richest and most challenging aspects of research in marketing. -
Eco-Mechanisms Within Economic Evolution – Schumpeterian Approach
Agnieszka Lipieta Cracow University of Economics Poland Andrzej Malawski Cracow University of Economics Poland Eco-mechanisms within economic evolution – Schumpeterian approach Corresponding author Agnieszka Lipieta Department of Mathematics Cracow University of Economics Rakowicka 27, 31 – 510 Cracow, Poland +48 12 2935 270 e-mail: [email protected] https://orcid.org/0000-0002-3017-5755 Eco-mechanisms within economic evolution – Schumpeterian approach Abstract Supporting eco-innovations and economic eco-activities is one of a important challenge to decision makers. The above is related to the problem of specification of mechanisms resulting in introducing eco-innovations. The original vision of the economic evolution determined by innovation was firstly presented by Joseph Schumpeter who identified essential innovative changes as well as indicated different mechanisms governing the economic evolution. The aim of the paper is to suggest a cohesive topological approach maintained in the stream of Schumpeter’s thought, to study changes in the economy, which result in the elimination of at least one harmful commodity or technology from the market, by incorporating Hurwicz apparatus in a suitably modified competitive economy. Qualitative properties of mechanisms which can occur within the economic evolution are also analyzed. Keywords: eco-innovation; eco-mechanism; economic evolution JEL: D41, D50, O31 1. Introduction “Eco-innovation is any innovation resulting in significant progress towards the goal of sustainable development, by reducing the impacts of our production modes on the environment, enhancing nature’s resilience to environmental pressures, or achieving a more efficient and responsible use of natural resources” (Europa.eu› eu › pubs › pdf › factsheets › ec). In the interest of each community is introducing eco-innovations and eco-activities and the above should be the most important task and the challenge to decision makers. -
Chapter 3 Consumer Behavior
Chapter 3 Consumer Behavior Questions for Review 1. What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. (1) Preferences are complete: this means that the consumer is able to compare and rank all possible baskets of goods and services. (2) Preferences are transitive: this means that preferences are consistent, in the sense that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle A is preferred to bundle C. (3) More is preferred to less: this means that all goods are desirable, and that the consumer always prefers to have more of each good. (4) Diminishing marginal rate of substitution: this means that indifference curves are convex, and that the slope of the indifference curve increases (becomes less negative) as we move down along the curve. As a consumer moves down along her indifference curve she is willing to give up fewer units of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. This assumption also means that balanced market baskets are generally preferred to baskets that have a lot of one good and very little of the other good. 2. Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods? A set of indifference curves can be upward sloping if we violate assumption number three: more is preferred to less. When a set of indifference curves is upward sloping, it means one of the goods is a “bad” so that the consumer prefers less of that good rather than more.