Question

A local Birmingham-area restaurant chain introduced a new summer menu in its Vestavia Hills location, but not its Mountain Brook location. Nightly revenue averaged $8,000 in Vestavia Hills and $7,000 in Mountain Brook before the menu change, but $9,500 in Vestavia Hills and $8,000 in Mountain Brook after the menu change.

a. The difference-in-difference estimate of the increase in average nightly revenue attributable to the menu change is

b. In the previous question, the increase in average nightly revenue attributable to summer, rather than the menu change, is

Answer 1

Birmingham area restaurant introduced a new summer menu in Vestavia and not at Mountain Brook location.

Vestavia revenue averaged $8,000 and Mountain Brook revenue averaged $7,000 before the menu change.

Vestavia revenue averaged $9,500 and Mountain Brook revenue averaged $8,000 after the menu change.

a. Thus the difference in difference estimate of the increase in average nightly revenue attributable to menu change is $500 as Vestavia's revenue increased by $500 more than that of Mountain Brook.

It is also defined as the difference in average outcome in treatment group which is Vestavia before and after the meny change minus the difference in average outcome in Mountain Brook location which is the control group before and after the introduction of the menu change.

Thus (9500 - 8000 ) - ( 8000 - 7000 ) = 1,500 - 1,000 = $500

b. On the other hand, the increase in average nightly revenue attributable to summer, is $1,000 as Mountain Brook's revenue also increased by $1000 without the change in menu change, thus the $1,000 increase in both the locations is attributable to summer.