Question

3.

You are the head of a research team. Your team is analyzing the behavior of a group of consumers toward a number of consumption goods. In particular, the team must estimate the elasticity of substitution of the consumers among these goods.

You are now instructing your team members about how to undertake this estimation job. Your task is to explain each step to your team members.

Answer 1

Answer) Let us assume that there are 5 goods and 10 people,so following are the steps to perform the task

1. Put 5 goods belonging to same category which can be substituted in front of group of 10 people and tell them the prices of goods.
2. Second step will involve people giving their preferences of these 5 goods
3. Third step will involve using different combinations of people,goods and prices,for example let us say good 1 costs $10 and good 2 costs $15,person E has given good 1 as his/her first preference and good 2 as his/her second preference,now we tell that person that price of good 2 has decreased to $9 ,will they prefer good 2 now ,what about at price of $11 or at $10,so we make different combinations of choices,people and prices and see to what extent elasticity of substitution is there.
4. In fourth step we eliminate any bias as if someone is just looking at a particular product only because they are long term loyal customers or any such bias.
5. In fifth and final step we analyze product by product,like which product people preferred even in case of price decrease in other,we can conclude how inelastic and elastic the substitution effect is in that case and similarly find for all products and do the same exercise from people 's perspective and draw conclusions.

Answer is complete.Thank you!