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204_summer_2009_lecture_5

204_summer_2009_lecture_5 - University of Toronto...

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Unformatted text preview: University of Toronto Department of Economics ECO 204 Summer 2009 Sayed Ajaz Hussain Lecture 5 1 Ajaz Hussain. Department of Economics Last Time ¡ Modeling some preferences ¡ Utility maximization problem (UMP) ¡ Optimal choice & Sensitivity analysis ¢ Cobb ‐ Douglas utility function ¢ Complements utility function ¢ Perfect substitutes utility function ¡ Please review Lecture 4 for UMP, optimal choices and characteristics 2 Ajaz Hussain. Department of Economics Today ¡ Perfect substitutes preferences: applications ¢ An explanation – and implications ‐‐ for perfect competition ¢ 3 mini case studies ¡ “Incentives”: applications ¢ Naïve marketing ¢ “Treating” addiction ¢ Rational teenage sex drive ¢ Subsidized education ¢ Declining population growth rates ¡ Inter temporal consumption ¢ The “real” interest rate Ajaz Hussain. Department of Economics 3 Perfect Substitutes UMP Ajaz Hussain. Department of Economics 4 Q 2 Q 1 P 1 > P 2 P 1 < P 2 Q 2 Q 1 Slope = ‐ 1 Slope = ‐ 1 Optimal Choices when P 1 > P 2 Q 1 = 0 Q 2 = Y/P 2 Optimal Choices when P 1 < P 2 Q 1 = Y/P 1 Q 2 = 0 U = Q 1 + Q 2 Perfect Competition Explained ¡ From ECO 100, in perfect competition demand curve facing firm is horizontal ¢ Why? ¡ How do perfect substitutes explain perfect competition? ¢ How is this explanation different from ECO 100? ¢ Lessons for Business? Ajaz Hussain. Department of Economics 5 P Q Demand Perfect Competition: an Explanation Ajaz Hussain. Department of Economics 6 2 Q 1 Slope = ‐ 1 P 1 = P 2 In theory, how much of each good will consumer purchase? According to this view, will any firm have a dominant market share? Yet .. explain why Amazon.com & Zappos.com are successful See Economist article on zappos.com Optimal choices when P 1 = P 2 Q 1 = [0 , Y/P 1 ] Q 2 = [0, Y/P 2 ] Case Analysis: Fuji , Kodak Film ¡ In 1993: ¢ U.S. unit market shares: Kodak 70%, Fuji 11% ¢ U.S unit market growth rates: Kodak 3%, Fuji 15% ¢ Source: HBS Case “ Eastman Kodak Company: Funtime film ” ¡ Kodak’s “flagship” brand Gold Plus priced 17% > than Fuji ¢ Justification for higher price: Kodak a superior film ¢ (Still) Advertised as: “Why trust special moments to less than Kodak film?” ¡ C onsumer Report found little difference between Kodak & Fuji. Customers: “tend to view film as a commodity” ¡ Evaluate Kodak’s price premium over other brands Ajaz Hussain. Department of Economics 7 Fuji Kodak & Fuji Consumer Preferences before “Commoditization” Kodak 8 Ajaz Hussain. Department of Economics Fuji Kodak & Fuji Consumer Preferences after “Commoditization” Kodak 9 Ajaz Hussain. Department of Economics Mini Cases: Coffee and Tires ¡ Starbucks & McDonalds ¢ Why was Starbucks successful?...
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