Managerial Economics - Differentiated Products

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Questions and Answers

What is the mean value ($ ext{μ}$) of the price for consumers' valuations of the iPhone 13?

$700

$800 (correct)

$750

$900

What role does the standard deviation ($ ext{σ}$) play in the distribution of valuations for the iPhone 13?

It indicates a lower range of valuations.

It reflects the variability in consumers' valuations. (correct)

It measures the number of consumers.

It determines the fixed price of the product.

In a normal distribution, what happens to the number of consumers when the price of a substitute increases?

The number of consumers fluctuates randomly.

The number of consumers remains constant.

The number of consumers increases. (correct)

The number of consumers decreases proportionally.

Which linear demand function is indicated by the provided quantity and price data?

Q(p) = 11,250 - 𝑎(p - $800) (D) Signup and view all the answers

What is the significance of the symbol $Q_ℓ$ in the demand function context?

It indicates the quantity demanded when price equals $800. (D) Signup and view all the answers

What is the equation that represents the linear demand function for the iPhone 13?

$Q_p = 11,250 - ap - 800$ (B) Signup and view all the answers

What does the parameter $eta$ in a linear demand function primarily indicate?

The slope of the demand curve (A) Signup and view all the answers

If the price of the iPhone 13 is increased by $1, how many fewer consumers will buy it?

31 consumers (C) Signup and view all the answers

What distribution is used to characterize consumer valuations for the iPhone 13?

Normal distribution (A) Signup and view all the answers

What is the total number of consumers indicated in the demand function for the iPhone 13?

22,500 consumers (C) Signup and view all the answers

In the context of the demand function, what does the parameter $ heta$ represent?

Standard deviation of valuations (B) Signup and view all the answers

What is the effect of an increase in price on the quantity demanded according to the demand function?

Quantity demanded decreases (D) Signup and view all the answers

When the price of the iPhone 13 is set at $800, what is the initial quantity demanded?

11,250 units (C) Signup and view all the answers

What is the primary formula used to determine quantity in the provided linear demand function for the iPhone 13?

𝑄ℓ = 11,250 - 31𝑝 - 800 (A), 𝑄ℓ = 36,050 - 31𝑝 (B) Signup and view all the answers

What does the normal distribution represent in the context of consumer valuation for the iPhone 13?

The likelihood of consumers valuing the iPhone 13 around a particular price point. (B) Signup and view all the answers

Which value represents the mean ($ar{x}$) of the consumer valuations in the normal distribution for the iPhone 13?

$800 (D) Signup and view all the answers

What factor is directly influencing the quantity demanded ($Qℓ$) of the iPhone 13 in the given linear functions?

Price of substitutes (A) Signup and view all the answers

How does the standard deviation ($ ext{σ}$) affect the valuation distribution among consumers for the iPhone 13?

It indicates a wider range of valuations among consumers. (A) Signup and view all the answers

Why might modern firms like Amazon and Uber utilize linearized demand models?

To accurately predict consumer behavior and optimize pricing strategies. (D) Signup and view all the answers

What is likely the total number of consumers considered in the analysis of demand for the iPhone 13?

22,500 (D) Signup and view all the answers

In the given demand function, which factor contributes to the decreasing quantity supplied as price increases?

Higher price leading to lower overall demand (A) Signup and view all the answers

Study Notes

One Minute Warning Times

60, 50, 40, 30, 20, 10, 9, 8, 7, 6, 5, 4, 3, 2, 1

Reminders & Announcements

Office hours and recitations are underway
Times and rooms/Zoom links are posted on Canvas
Office hours: Wednesday 2:50pm-3:50pm (Dinan 332)
First set of practice questions are due this week
Covers Lectures 1 & 2, due Friday night at 11:59pm

Managerial Economics BEPP 6120: Differentiated Products: Choice and Demand

Differentiated products have different values for consumers.
Different firms can have different prices.
Undifferentiated products have the same value for consumers.
Undifferentiated products have one market price in equilibrium.

Oligopoly

Consumers value undifferentiated products equally.
One market price in equilibrium for undifferentiated products.
Consumers value differentiated products differently.
Different firms can have different prices for differentiated products.

Outline

Choosing Between Two Options
Valuation Space
Dividing Valuation Space by Purchasing Behavior
General and Linearized Demand Systems

Reservation Values Revisited

Consumer reservation value (v) and price (p) determine purchasing decisions.
If v > p, the consumer buys.
If v < p, the consumer doesn't buy.
If v = p, the consumer is indifferent.
A new model is needed to handle more complicated scenarios.

Relevant Options

Buy one unit at price p.
Don't buy any at all.
Buy one unit from Firm A at price PA.
Buy one unit from Firm B at price PB.
Don't buy at all.
Consumer considers basic cell plan from Verizon or AT&T.

Valuations

Each consumer has a valuation (vᵢ) for each option.
Consumers choose the option maximizing consumer surplus (vᵢ - pᵢ).
Non-purchase option's (Don't Buy) surplus is zero.
If multiple options maximize surplus, the consumer is indifferent.

Valuation Space

BEPP 6110 model uses an ordered bar chart to determine demand based on reservation values.
The model becomes more complex when consumers have values for multiple goods.
Consumers are represented as points in a graph for valuations of AT&T and Verizon.

The "Swarm" of Consumers

Consumers are represented as points on a graph.
The points represent the consumer's valuations for AT&T and Verizon.

Different Market Types in Valuation Space

Visual representation of different market types.
Consumers' values for multiple goods are displayed on a graph.

Starlight Candy Service

Good one: everyone gets a peppermint starlight.
Good two: everyone gets a licorice starlight
Valuations depend on each consumer's preferences.

Where Do Consumers Buy Nothing?

Consumers prefer nothing over AT&T if their valuation for AT&T is less than or equal to the price.
Consumers prefer nothing over Verizon if their valuation for Verizon is less than or equal to the price.

Where Do Consumers Buy From Verizon?

Consumers prefer Verizon to nothing if their valuation for Verizon is greater than or equal to the price for Verizon.
Consumers prefer Verizon to AT&T if their valuation for Verizon is greater than or equal to their valuation for AT&T plus the difference between the prices.

Where Do Consumers Buy From AT&T?

Consumers prefer AT&T to nothing if their valuation of AT&T is greater than or equal to the price for AT&T.
Consumers prefer AT&T to Verizon if their valuation of AT&T is greater than or equal to their valuation for Verizon plus the difference in the prices.

A Map of Consumer Purchasing Decisions

The graph shows the consumers' choices given their valuations and prices.

Building Demand From Consumer Valuations

The quantity demanded for Verizon is the sum of the consumers in the defined area of the graph.

Properties of Imperfect Substitutes Demand

Demand for a product decreases with its own price and increases with a substitute's price.

Linearizing One-Good Demand Functions

The general demand function for a single product is linear.
The demand function has a slope and a intercept.
Consumers' valuations are normally distributed.

Linearizing Two-Good Demand Systems

Demand system for two products can be linearized.
Linearized demand system uses reference prices.

Reference Quantities

Reference quantities are demands at reference prices.

Own- and Cross-Price Responses

Own price response is greater than cross-price responses.
It depends on how many potential customers are on the fence to buy the product

Marginal Consumers

Marginal consumers are those that change purchasing behavior in response to small changes in price or valuation.

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Description

This quiz covers key concepts from Managerial Economics BEPP 6120, focusing on differentiated and undifferentiated products. It explores consumer choices, market prices, and the implications of oligopoly in product valuation. Test your understanding of choice and demand in competitive markets.