ajaz_eco_204_2012_2013_chapter_16_Market_Power

# Estimating demand model from ump in consumer theory

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Unformatted text preview: nd function/curve. For example, in the PTC case we were told that at the current (March 2003) commercial price and output that raising/lowering commercial price by \$200 would decrease/increase commercial output by 30%. Since the price and quantity changes are symmetric, we can derive the demand curve equation (review lectures and HWs). Estimating demand model from UMP: In consumer theory, we were able to derive a price taking consumer’s demand function from her (rational) preferences and exogenously given prices and income. For example, suppose a consumer has the utility function: ( ) 7 ECO 204 Chapter 16: Analysis of Firms with Market Power (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Letting good 2 be the base good, and assuming an interior solution to the UMP yields the consumer’s demand function for good 1 (obviously, you should prove this result): Estimating demand model from regressions4: Loosely speaking, the basic idea of regression analysis is that we specify an economic relationship between a variable and possibly several variables , , , such as for example: According to this model there’s a deterministic relationship between and , , , . However, in reality there might be other factors that impact but are not in the model. Lumping all those other factors (whether deterministic or random) into an “error” term yields the econometric model: A...
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