1Explicit cost
is the cost you must pay out-of-pocket to purchase something
2Implicit cost, or opportunity cost
is the value of what you forgo by incurring the explicit cost
3Economic profit:
Revenue –explicit cost –implicit cost
4Mental Accounts
the idea of a separate account for windfalls, or unexpected large gains.
5all differences are considered sunk
costs
costs that have already been incurred and
cannot be recovered.
6Independence of Irrelevant Alternatives (IIA)
is met if adding (or subtracting) irrelevant options does not change an existing preference ordering
7Example: If the menu is {X, Y}, and X >Y, the addition of a new option Z should
not cause Y >X.
8Menu Dependence
references change as the menu changes
-exists whenever the IIA property is violated
9decoy effect
may change the buyer’s
preferences if they exhibit menu dependence when presented with a third option, that is asymmetrically dominated
Ex: Must be worse than the dominant option in everyway, but better than the other option in one way
10Example of decoy effect:
small popcorn
medium popcorn
large popcorn
Which is the decoy?
medium popcorn "this is the decoy"