Analysis of Experiment 3

Setup of Experiment 3

--Points on Level 1: (1,120), (2,90), (3,65), (4,45), (5,30), (6,18), (7,11), (8,6), (9,3), (10,2.50), (11,2.25)

--Points on higher levels: Multiples of level 1 pointse.g., (3,360), (6,270) on Level 3

#### Optimal Choices

 Round Income Price of X QX:QY Level QX 1 90 3 9:3 3 27 2 180 12 6:18 2 12 3 90 0.5 10:2.5 12 120 4 30 3 9:3 1 9 5 90 0.25 11:2.25 18 198 6 180 3 9:3 6 54 7 90 12 6:18 1 6

Analysis: WTP Schedule

 Point on Level 1 (QX:QY) WTPX (in units of Y) 1:120 -- 2:90 30 3:65 25 4:45 20 5:30 15 6:18 12 7:11 7 8:6 5 9:3 3 10:2.5 0.5 11:2.25 0.25

--Optimal Choice: QX:QY such that WTPX(QX:QY) = PX/PY = PX

--Maximum Level = Income/(Cost of chosen QX:QY), e.g., in Round 1, PX = \$3, cost of 9:3 = 3 x 9 + 1 x 3 = \$30, so level = \$90/\$30 = 3

--Optimal QX = Level x QX in optimal choice, e.g., in Round 1, QX = 3 (for Level 3) x 9 (from 9:3) = 27

Elasticities of Demand

Price elasticity of demand

ED = -%ΔQD / %ΔP = -[(Q1  Q0)/Q0] / [(P1  P0)/P0]

For example, Income = \$90, P0 = \$3, Q0 = 27 (Round 1), Income = \$90, price falls to P1 = \$0.50, quantity rises to Q1 = 120 (Round 3)

ED = -[(120  27)/27] / [(0.50  3)/3] = 3.44/0.83 = 4.14

Income elasticity of demand

EI = %ΔQD / %ΔI = [(Q1  Q0)/Q0] / [(I1  I0)/I0]

For example, Income I0 = \$90, P = \$3, Q0 = 27 (Round 1), income rises to I1 = \$180, P = \$3, quantity rises to Q1 = 54 (Round 6)

EI = [(54  27)/27] / [(180  90)/90] = 2/2 = 1