A certain type of rare gem serves as a status symbol for many of its owners. In theory, for low prices, the demand decreases as the price of the gem increases. However, experts hypothesize that when the gem is valued at very high prices, the demand increases with price due to the status the owners believe they gain by obtaining the gem. Thus, the model proposed to best explain the demand for the gem by its price is the quadratic model
E(
y) =
β0 +
β1x +
β2x2where
y = Demand (in thousands) and
x = Retail price per carat (dollars).
This model was fit to data collected for a sample of 12 rare gems.
Does there appear to be upward curvature in the response curve relating
y (demand) to
x (retail price)?
◦ No, since the value of
β2 is near 0.
◦ Yes, since the
p-value for the test is less than .01.
◦ Yes, since the value of
β2 is positive.
◦ No, since the
p-value for the test is greater than .10.
Applying Signal Detection Theory
Kitagawa Utamaro, The Fickle Type, from the series Ten Physiognomies of Women.
Social class and social status
International Economics: Theory and Policy (10th Edition)
Set-Point Theory
Activation Synthesis Theory of Dreams