1Chapter 4Empirical Price AnalysisAn 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-makers1.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 decisionsRecall that total revenue depends on price elasticities of D;price discrimination –determine impacts of S and D shifts on priceIncome 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 Mayw/forecast, E(Oct corn price) =$2.90⇒more corn planted in May3.Price analysis models cheaper than market experimentationExamples:–Simulate price impacts of alternative advertising scenarios using S-D model–Simulate price impacts of reducing supply
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