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