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CHAP4 - Empirical Price Analysis An economist is a trained...

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1 Chapter 4 Empirical Price Analysis An economist is a trained professional paid to guess wrong about the economy. An econometrician is a trained professional paid to use computers to guess wrong about the economy. Why is empirical price analysis useful? Aid decision-makers 1. Knowledge of elasticities important, e.g.: –estimate costs/benefits of a policy option, e.g., taxes and subsidies. Recall that tax incidence is determined by the relative size of price elasticities of D and S –help business pricing decisions Recall that total revenue depends on price elasticities of D; price discrimination –determine impacts of S and D shifts on price Income elasticity, advertising elasticity, etc. 2. Better estimates of future price important for optimal decision making, e.g.: in May, E(Oct corn price) = $1.50, actual Oct price = $3.40 => too little corn planted in May w/forecast, E(Oct corn price) =$2.90 more corn planted in May 3. Price analysis models cheaper than market experimentation Examples: –Simulate price impacts of alternative advertising scenarios using S-D model –Simulate price impacts of reducing supply
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