Consider a market with differentiated products, such as the
automobile
market or the mobile phone market. There are J products, produced
by F firms. The
subscripts j and f refer to individual products and firms,
respectively. As an example
of the subscripts, we might use xj to refer to the characteristics
of product j and af to
refer to the advertising expenditures of firm f.
Consider A Market With Differentiated Products Such As The Automobile Market Or The Mobile Phone Market There Are J Pr 1 (220.32 KiB) Viewed 54 times
3. (6 points) Consider a market with differentiated products, such as the automobile market or the mobile phone market. There are J products, produced by F firms. The subscripts j and ƒ refer to individual products and firms, respectively. As an example of the subscripts, we might use x; to refer to the characteristics of product j and a f to refer to the advertising expenditures of firm f. Suppose researcher A decides to model the marginal cost of product j, denoted mcj, with the equation In mcj = W j Y + Wj , where w, is a vector of observable characteristics that affect cost, 7 is a vector of parameters to be estimated, and w; captures the unobservable components of cost. Researcher B looks at this equation and notes that y does not have an f subscript on it. (a) (3 points) Interpret Researcher B's. What does the lack of a f subscript mean about the way Researcher A is modeling costs? (b) (3 points) Researcher B says this is a strong assumption and that Researcher A should consider changing their model. Researcher A says that it shouldn't matter in the industry they are studying. What features of the industry would make you more likely to agree with Researcher A? What would make you more likely to agree with Researcher B?
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