EBK ECONOMICS
5th Edition
ISBN: 8220106907184
Author: KRUGMAN
Publisher: YUZU
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Chapter 9, Problem 9P
To determine
the given statements accompanying with the case.
Concept Introduction
Marginal Cost: Marginal cost refers to the change in cost which is incurred when an additional unit of any good or service is produced.
Marginal Benefit: Marginal benefit refers to the change in benefit which is earned when an additional unit of any good or service is produced.
Marginal Analysis: Marginal analysis is the analysis of the additional revenue earned by spending the additional cost. The profit of a business maximizes when the marginal revenues are same as the marginal cost.
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CEO Salary and Firm SalesWe can estimate a constant elasticity model relating CEO salary to firm sales. The data set is the same one used in Example 2.3, except we now relate salary to sales. Let sales be annual firm sales, measured in millions of dollars. A constant elasticity model is[2.45]ßßlog (salary) = ß0 + ß0log (sales) + u,where ß1 is the elasticity of salary with respect to sales. This model falls under the simple regression model by defining the dependent variable to be y = log(salary) and the independent variable to be x = log1sales2. Estimating this equation by OLS gives[2.46]log (salary)^=4.822 + 0.257 (sales) n = 209, R2 = 0.211.The coefficient of log(sales) is the estimated elasticity of salary with respect to sales. It implies that a 1% increase in firm sales increases CEO salary by about 0.257%—the usual interpretation of an elasticity.
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