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Utility Analysis
Maximizing Constrained Marital Choices
Hugh H. Macaulay,
Many students have difficulty with constrained maximization as an objective whenever people make choices. I present my students with a story that deals with untraditional prices and budget constraints. I try to look morose as I begin this tale, as if I had just come out on the losing end of a spat with my wife.
"When I was young, I thought _____ (famous actress from my period) was just the epitome of lovely womanhood. In my heart, I lusted for her. My wife‑to‑be thought _____ (movie star of period) was everything a man could be. Why did I settle on her? More strangely, why did she settle for me? Well, I had looked around and discovered that, given my physical and mental attributes and general prospects, the best I could do was marry _____ (spouse's name). I just couldn't do better. But why did she marry me, knowing the way I viewed _____ (actress's name)? She had looked around a bit too, and decided that in spite of my many flaws, I was the best she could reasonably expect to catch‑‑_____ (movie star's name) had other choices available that he saw as preferable to my spouse. We both did the best we could."
Naturally, you can vary this language and embroider it with your own asides, etc., but it always captures students' attention, and helps them to see that economic choices and maximizing behavior extend far beyond the realm of standard choices about consumer goods, production decisions, and other examples we use in class. Further, the example shows that economists seek, and we usually get, the best that is attainable; perfection is not likely our lot.
Constrained Maximum in Principles of Economics
We live in a world of constraints. In fact constraints are so commonplace they go generally unnoticed. Gravity is a constraint that bounds us to the earth, though we pay no conscious attention to it. Money (or income) is also a constraint that bounds us to a "level" of living. We usually assert that given her income and given commodity prices, the consumer wishes to economize or maximize her utility by consuming the largest possible "bundle" of goods. Even after we plug in numbers for concreteness and draw a picture for further "clarity"--the abstraction of this concept of constraint does not go away. To add a measure of palpability, we offer the following analogy: suppose you live in a house with two rooms connected by a common wall with a door. One of the rooms (room A) has a fireplace in the center of the floor; the other room (room B) does not. On a fiercely cold winter day, room A will be hot and room B cold (see figure 21-1).
Figure 21-1
Someone standing at the east wall in room B would find that by moving toward the west wall of the room, she will feel increasingly warmer. If the door is locked and she has misplaced the key, then the constraint is "binding". The best she can do is stand next to the west wall of room B. However, if the door is open, the constraint is not binding and all the poor girl has to do is walk through the door and get comfortably close to the fireplace. Thus, there are two possible maxima.
Personal Computers: Economics and Rational Decisions
Eric K. Steger,
In my introductory economics classes, I typically use the decision regarding the purchase of a personal computer to help students use economic analysis in decision making. I first ask them to consider what needs they have. Do they need to compile a shopping list, an appointment calendar or a diary? If so, pen and paper for less then $5 can do the job. If their needs include school papers, documents of 8 pages or less and personal letters, then an electronic typewriter for $150‑$500 can do the job. Only when it is necessary to do college theses, lengthy documents, documents with graphics, serious creative writing and mail/merge for mailings do they need to spend $600‑$1500 for IBM PC/XT compatibles.
Consumer Reports, March 1988, was valuable for this idea.
Charles Diamond, American University n Cairo
Students need to realize that the principle of maximizing behavior does not assume that consumers' behavior is purposive or that they are consciously aware of their utility functions; this principle lends insights into describing consumer behavior, but it is not the behavior itself. Astronomers similarly describe the orbital paths of planets around the sun; presumably the planets are unaware of their behavior. On the other hand, some students may say that while the principle of maximizing behavior is a theoretical concept (borrowed from math) that does not correspond to real‑world behavior. I counter with an example of their decision‑making process in choosing their class schedules, and begin by writing a version of the following table on the chalkboard.
CLASSES ECON 200 ECON 221 ECON 245
Preferences Weight rank/score rank/score rank/score
a. no papers 10 10/100 7/70 0/0
b. 10:00‑2:00 8 6/48 10/80 8/64
c. lively instructor 10 2/20 10/100 5/50
d. small classes 5 4/20 6/30 10/50
e. discretion
TOTAL WEIGHTED SCORE 188 280 164
Students are asked for a list of alternative classes they could have taken along with a list of their preferences or wants associated with classes and a weighting on a 1‑10 scale (10 highest) as to its importance. The class with the highest score is signed up. This emphasizes that a choice or a decision made in the constrained maximizing framework involves trade‑offs between preferences and the alternatives (constraints) at hand whether visibly as above or lightning quick in the mind.
Consumer Equilibrium in Burger King
Homayoun Hajiran,
The following example has helped me to illustrate the concept of consumer equilibrium to my students. I asked them to reflect on their eating habits during their last visit to their favorite fast food restaurant. Having ordered a hamburger, a small order of fries, and a drink, a typical consumer will have a bite or two of the hamburger, then a few fries and perhaps a sip or two of the drink. Why don't they finish each item completely before starting the next?
A higher rate of consumption of an item (e.g., hamburger) results in lower marginal utility of that item. Hence, by switching from consumption of one item to another, they must have been continually trying to maintain their consumer equilibrium status
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MUH = MUF = MUD
PH PF PD
Diminishing Marginal Utility, Fasting, and Sex
Hermilo Jasso, Jr.,
I try to illustrate the principle of diminishing marginal utility
in human terms by proposing the following thought experiment for students. Let's assume that you have been fasting for five days, perhaps you want to lose weight or because of spiritual reasons. You have gone five days without food and after the fifth day you to the nearest McDonald's and order a Big Mac. How will that first Big Mac taste?
(I give room for discussion)
Well, as you can see the first hamburger will taste like heaven. Let's say that you are still hungry, so you order a second hamburger. How will the second hamburger taste? Good, but not as good as the first one. Let's say we can measure the satisfaction on a scale of 1-10. We will call this utility. The first one will taste like a 10. The second one like an 9. So a picture will begin to develop. The third one like a 4, and so on. As you can see the principle of the diminishing margin utility begins to take effect. How will the fifth hamburger taste? Well, you will probably get a stomach ache or even diarrhea. (I give time for the class to laugh then I continue) This applies to the consumption of every product. Even to the more desirable product. On this planet it has to be sex and as you can see the same principle applies.
Eric K. Steger,
I often use myself as an example to illustrate diminishing marginal returns. I ask my students if they have ever eaten at a restaurant that serves "all you can eat" meals? Most have. I ask them if they ever behave irrationally as I do when I am determined to consume a second or third plate of food? I explain that my marginal utility received for the second plate of food is less than the first but I continue eating up to the point where the marginal utility per plate of food consumed is zero. I do this because the costs of the meal are fixed and therefore the cost per plate consumed falls. I explain that an "all you can eat" offer is a "personal challenge" to me. Occasionally, some students point out that the long run potential costs of this behavior involve obesity, etc.
Ralph T. Byrns
Some students erroneously get the idea that economists assume that marginal returns continuously diminish. To point out that returns may initially increase, but eventually diminish, ask why it some-times takes a few jokes before a stand-up comic has an audience warmed up. (Returns may initially increase.) Point out that, after several jokes, only increasingly funny jokes will rock a crowd with belly laughs. (Diminishing returns) Finally, point out that people's embarrassed titters upon hearing a familiar joke shows that activities that initially yield positive returns may eventually yield only negative marginal returns. Few people find a joke amusing after hearing it the second or third time.
How the Marginal Utility for Candy Falls
By Sherry Wetchler, Economic Research Services
The concept of diminishing marginal utility can be initially
difficult for students to grasp. First,
begin by drawing a marginal utility curve on the blackboard like the one
below. Explain that a consumer has
diminishing marginal utility from a good if each extra unit of the good
consumed adds less to total utility than the unit before. Next, ask the class if anyone likes candy
bars. Choose a student to come up to the
front of the classroom. Then, give the
student a candy bar to eat. After the
student finishes, ask the student to tell the class how much satisfaction
he/she received and how much he/she would pay for the good. Continue this procedure until the student
refuses to eat one more (I have found that this usually occurs after about
three candy bars) and then, summarize.
O. Henry Hoversten,
Time and place utilities can be demonstrated by exploring possible answers to such questions as:
a. Why is today's metropolitan newspaper "worth" the price charged at the newsstand and tomorrow it may have zero or even a negative value?
b. Why is a new wheelbarrow "worth" $25 at the hardware store on Saturday AM, but only a small fraction of $25 as soon as you bring it home and put it in your garage?
c. Why may a football ticket to the big game be "worth" several times what you paid for it a week or two before the game and only a fraction of what you paid for it minutes before the game, and worthless a few minutes into the game?
Value in Use vs. Value in Exchange
Eric K. Steger,
To illustrate the different concepts of value I ask students
what items would they try to get out of their homes if there was a fire, assuming
that people are safe and they have 20 seconds to decide. I give them 20 seconds
and then take up their papers. Typical answers include books, stereos, TVs,
etc. Some students indicate that they will rescue pictures. I point out that
the pictures have little value, if any, in exchange but substantial value in
use. Televisions, stereos, etc. have some value in exchange and use but can be
replaced rather easily whereas pictures are usually not replaceable.
Steven E. Plaut,
Most students are disturbed by the rationality assumption. I make it appealing by using my large red cat, Tuli, as an example. Tuli is a rational consumer who:
a. Is capable of choosing among different foods.
b. Experiences diminishing marginal utility from food.
c. Has a transitive preference ordering (Tuna is preferred to milk is preferred to dry food).
POINT: Rationality is so loosely defined that even a cat fits. NOTE: Animals obey many other "laws" of consumer behavior, including risk aversion and the ability to choose under conditions of uncertainty.
Making Students Introspective About Consumption
Ralph T. Byrns
Challenge students about whether their consumption patterns conform to the principle of equal marginal utility per dollar. Try to get students thinking about this concept, and some will probably later report to you that they find themselves thinking about whether they are making optimal purchases as they go down supermarket aisles.
Income and Substitution Effects at the Center
Joe Walker,
Students need relevant and exaggerated examples to make some abstract economic concepts hit home. The following example does this for income and substitution effects:
You've been going to the center every day to eat lunch‑‑ usually a grilled cheese sandwich ($1.00) and a cola ($.50). One day you go in, though, and the grilled cheese now costs $1,000! Just as you begin to despair, your long lost rich uncle (or aunt) appears and, feeling sorry for you, gives you $1,000 so you can buy your favorite sandwich. Do you buy the sandwich? Why not! You can afford it now, can't you? What has happened is that your real (apparent) income has been held constant and only relative prices have changed. In accordance with the Slutsky substitution effect, you now go for some other good (like hot dogs) and substitute away from the relatively higher priced grilled cheese.
Love as Complementary Neuroses
Gary Galles, Pepperdine University
As a brief, humorous illustration of complements, I have had some success with the following (taken from a psychologist friend):
I ask my students what type of person they are likely to "fall in love" with (be attracted to), and try to summarize their disparate answers by saying that they will tend to "fall in love" with someone who is complementary (in both senses of the term) to the way they are. What does this mean for someone who is neurotic, though?
For example, I ask my class what type of woman a "macho man" would tend to fall in love with. I let them respond until they see (which won't take long) that he would tend to fall for a woman with a complementary (matching) neurosis‑‑one who tends to be overly dependent. I then ask about a woman who tends to be domineering‑‑who will she go for? She will tend to match up with a man who we might call overmothered (i.e., one who can be dominated), since that is a complementary neurosis to a domineering woman. In other words, "opposites attract" may be a cliché about complementary neurosis. In some cases, however, having the same neurosis can be complementary. For example, neat freaks would tend to be attracted to others of a similar streak rather than slobs (which is partly why Oscar Madison and Felix Unger could be called The Odd Couple, and why such mismatches are a constant scenario for situation comedies). Examples of what you would not tend to see would be a "macho" man with a domineering woman or two very shy and submissive types (how would they ever meet and raise the courage to start a relationship?).
This analysis also has implications for what happens when one partner acquires a new neurosis or overcomes an old one. If the respective neuroses become less complementary, disharmony in the relationship can arise and the change can be perceived as falling out of love. This may be why at the end of a relationship we tend to hear something like "I changed, but he (or she) didn't," with the implication that the changes made (or not made) were (or would have been) an improvement. Of course, we must note that the change could have been the beginning rather than the end of a neurosis. We could also ask about the chances for a neurotic couple whose neuroses don't exactly match, but she's sure she can change him to a more comfortable (for her) set of neuroses. She will always be trying to change him, and he will always resist ‑‑ discord will result and both will wonder why they aren't accepted for what they are (she, a meddler; he, comfortable with his own neuroses).
Is Public Transportation an Inferior Good?
Mark Zupan,
As an example of inferior goods, ask your students how many of them now use public transportation. After a show of hands, ask how many expect to use public transportation to get to their 25th class reunion (when they will presumably be substantially richer).
Gary Galles, Pepperdine University
I have found the following example very useful in: a) making students use and remember the concepts of normal and inferior goods; b) showing that the same good can be normal in some income ranges and inferior in others; and c) providing an example of a good that is at first inferior, and then normal, as income rises (all the other examples of this I have heard are for goods that are first normal and then inferior as income rises).
I have students consider a dog lover who especially likes large dogs, but who is very poor. In fact, he is so poor that all he can afford to eat himself is one can of dog food a day. Several sounds of disgust emanate from the class at this point, to which I reply that some people, even in the United States, are in this situation. I then go on to make a joke like "Besides, what's wrong with that? Dog food may be better for you than what you do choose to eat‑‑at least it gives you a glossy coat and a healthy, wet nose, and if you're lucky, you might even get a "Hi‑Pro" glow. Our dog lover obviously cannot afford to exercise his preference for dogs, because the opportunity cost of feeding one would be extremely high: food for the dog is food that he would have eaten himself; instead he goes hungry.
I ask the students what will happen to our dog lover's demand for dog food as his income rises from its present low level. While at the very first he may buy more dog food when he still can't afford much in the way of higher quality food (it would be a normal good in this income range), he will quickly substitute out of eating dog food and into other, preferred types of food when his income allows it [it would be an inferior good in this range ‑‑ the range where easing the income constraint allows the purchase of preferred, higher quality goods instead of the less‑preferred, lower quality good, because the value of what is given up is less when more income allows more of your preferences to be satisfied (i.e., the marginal value of a dollar given up to buy the preferred quality item is lower, the higher is income)]. Once his income rises enough, however, he can begin to indulge his preferences for dogs. Over the range of incomes in which he would get more (or bigger) dogs as income rises, his demand for dog food would again rise, making it a normal good in that income range. If his income reaches a high enough level, he may even begin to replace the dog food with more expensive alternatives (such as Higgins, on Magnum, P.I., who feeds his "lads" steak), making dog food inferior in this income range as well.
I summarize this story by saying that a normal good is one you would like more of if you had additional income, but an inferior good is one you would like less of if you had additional income to buy the higher quality goods you really want.
Complementarity and Incompatible Goods
Ralph T. Byrns
Elaborate the idea that goods embody utility relevant attributes that determine price, cross, and income elasticities of demand, how rapidly utility diminishes, whether goods are substitutes or complements, etc. For example, candy has the positive attributes that it tastes good, provides quick energy, etc. It has the negative attributes that its sugar contributes to tooth decay, obesity, etc. The search for new cooking recipes is essentially the search for complementarities among different types of food. Combinations of attributes of certain goods makes the thought of fudge and sardine casseroles repulsive, while hot fudge, bananas, and ice cream sounds like a mouth‑watering treat. Similarly, most people avoid wearing stripes with plaids, tennis shoes with tuxedos, etc.
Ali T. Akarca, University of Illinois at Chicago
The following example helps in explaining the idea of Giffen goods.
Suppose that you want to make a 10‑quart pillow as a gift for a friend. You would really like it to be 100% down‑filled, but can only spare $40 for this pillow and down costs $12 per quart. Polyester is an alternative filling costing only $2 per quart. Consequently, you decide to make your pillow 20% down, and 80% polyester. What would happen if the price of polyester rose to $4 per quart? You would have to make the pillow 100% polyester‑filled. Its price, of course, need not rise to $4. Any increase in the price of polyester filling would cause you to buy more of it, making it a Giffen good for you.
After giving this example, I say to the students, suppose it is not a pillow but your stomach that you are filling, and invite them to come up with other examples of Giffen goods.
How to Illustrate the Case of a Giffen Good
Tran Huu Dung,
Most students find it very frustrating to illustrate the case of a Giffen good using indifference curves and budget lines because rarely does a diagram come out right the first time.
Suppose that there are two goods, X and Y, and we want to show that X is a Giffen good, i.e., a decrease in its price would cause its consumption to fall. Here is the trick:
1. Do not begin by drawing the indifference curves. Instead, after drawing the two perpendicular axis the next step is to draw the two budget lines with a common Y intercept. Hint: Do not make these budget lines too steep.
2. Now
draw the two indifference curves tangential to the two budget lines (I1
and I2 in Figure 21-3), making sure that (a)
the tangency on the lower budget line (point E) lies very close to the
horizontal axis, and (b) the tangency on the higher budget line (E') lies to
the left of E.
Voila, the diagram illustrates the case of a Giffen good.
Figure 21‑3
For advanced students, the reason why this would work can be given. Recall the Slutsky equation
ûQx/ûPx = (ûQ'x/ûPx) ‑ Qx (ûQx/ûM)
where the income effect (which is responsible for the perverse effect) is proportional to the budget share of the good. By locating E very close to the horizontal axis, we make this share large and, hence, increase the likelihood that the good would come out Giffen.
Distinguishing Normal, Inferior, And Giffen Goods
Alan Gin,
Understanding how the substitution and income effects differ among normal, inferior, and Giffen goods is a problem for intermediate micro students. Figure 21‑4 aids in resolving this problem by using arrows of different lengths to indicate the direction and relative magnitude of each effect for each type of good.
It is most effective if you first distribute copies of the table and then proceed with standard graphical analyses of the substitution and income effects for each good, referring to the table where appropriate. Besides showing the direction and relative magnitude of each effect, the table can be used to emphasize certain important points, such as the fact that the substitution effect is always negative, that a Giffen good is also an inferior good, etc.
Figure 21‑4
Daryl Gruver,
To introduce the function of market prices, bring to class a cup of water, a jar of air, a candy bar, and something to represent an ounce of gold. Ask your class to rank the items according to their normal market prices, and then according to their value to human survival. Then question students about why the prices of these items are ranked in reverse order to their value to human survival.
Information and Transactions Costs
Duplicative Information and Decision Making
J. Thomas Davis,
Students are sometimes prone to making quick decisions to economic problems based on what they think is the total needed information. I use the two illustrations shown on overhead transparencies. I show the transparency indicating a single head of an animal and then ask the class to tell me whether it is a bird facing in one direction or a rabbit facing the opposite direction. As they start to hesitate, I then show them the second transparency and tell them that even if they see many more figures without additional information, they still can't make an accurate determination. However, if they have sufficient information to see that the animal has bird‑like legs, no amount of fast talking can convince them that the animal is a rabbit.
Figure 21‑5 Figure 21‑6
Looking for a Good (Enough) Man or Looking for the Best Man
Gary Galles,
"Let's talk about an error common to the analysis of both romance and business. When a firm is looking to fill a job position or someone is thinking about whom to marry, it is common to hear that they are looking for the best candidate or Mr./Mrs. Right. Such a statement is incorrect. It would be correct in a world of costless perfect information (no uncertainty), but in such a world search would not be necessary. In the real world of uncertainty and often very costly information, however, this is not correct, because the costs of finding out about who is the best match will typically exceed the benefits. A more correct statement would be that you are not looking for the "best man for the job," but for one who is thought to be (when the relevant decision must be made) close enough to the best man that the costs of further search exceed the net benefits of finding someone better."
A statement in class like this one is certain to generate student interest and responses, typically protests that it is incorrect. That is one reason I have found such an approach ideal for introducing issues of costly information and search behavior. It gets students to listen, because it deals with things they care about, ‑‑jobs (second) and romance (first) and it can be used to make sense of things they are, or will become, familiar with.
Among the predictable results of uncertainty/imperfect information are:
1. divorce/firings: mistakes get made, and sometimes those involved find it less costly (not costless) to "get out" than to continue the "mistaken" relationship.
2. sometimes the "best one" gets away: you may turn down Mr. Right, because you thought that he wasn't "the one," but further search convinces you he was "good enough." Unfortunately, he may no longer be available.
3. easier divorces (layoffs) mean shorter courtships and more marriages (hires) as well as more divorces, (e.g., mandatory notification or layoff benefits for firms and the number of new hires).
4. prenuptial agreements (dismissal arrangements) lower the costs of marrying the wrong person, in part by controlling for strategic misrepresentation.
5. since perfect information is too costly, you look for lower cost imperfect proxies. Examples include dating behavior, "gossip" from mutual acquaintances, parents, "track record" so far, reputation, appearance...
6. people "fall in love" at school because the information is better (see people under more circumstances, for example) and the costs of acquiring it are lower (cheap dates are okay, built in social arrangements and common experiences, for example)
7. greater potential costs from mistakes, (e.g., AIDS or crucial decision makers) lead to more precautions
8. appropriable rents exist after specialized investments in the relationship have been made.
More implications can be drawn, limited mainly by your imagination. But the main point of uncertainty/imperfect information and the resulting implications of risk, unavoidable errors, search behavior and mitigating devices (like contracts) will be clearly made. This example can then be concluded by indicating the widespread extent to which the principles derived apply.
Barry P. Brownstein,
The question of when to get married can be seen as an application of microeconomic search theory. Whether to get married or continue searching has certain expected benefits and costs. As long as the marginal benefits are greater than the marginal costs, continued search is wise. To go past the point where, at the margin, the costs exceed the benefits would be unwise. The student must at this point realize that economists are not taking the romance out of love‑‑ everybody uses this type of reasoning whether they realize it or not.
But why are some people so indecisive about marriage? This is a good time to explain and illustrate the subjective nature of costs and benefits. Costs are not objectively measurable and are inexorably bound to choice. New information is available continuously and can change the decision maker's subjective estimates of the cost and benefits involved. Thus, one day the marginal benefit of continued search might exceed the marginal costs and marriage is not advisable. The following day, in the light of new information, the marginal costs of continued search might exceed the marginal benefits, making a trip to the altar a good choice.
Viewers Choice and Transactions Costs
Eric K. Steger,
I use the market for viewers choice and video tape rentals to help students understand how transactions costs influence consumption behavior. Viewers choice is a system that allows cable TV subscribers to receive a relatively new movie on special channels on cable TV and receive a special billing for the movie. Typically, the fee for the one time viewing exceeds the price one would pay to rent the same movie on videotape. I ask students, "Why is there a market for such entertainment?" I then explain that although the dollar price of viewers choice is higher than the video tape rental price, the overall or full price is lower when one considers transactions costs. The transactions costs include search time to locate the certain video tape, driving time and wear and tear on the car, waiting in line to check out and check in the tape, etc. When all of this is explained, the concept of transactions costs is usually clear.
Gary M. Galles,
As we approach the end of another academic year, when senioritis reaches its peak among soon‑to‑graduate students and teachers start complaining in earnest about its epidemic proportions, it is time we gave some thought to the curious malady. It is time to defend those suffering from its effects, because it is a disease of the system rather than the seniors. Far from reflecting any sort of inherent character defect in the seniors, it is simply their rational response to change in the incentive structure they face.
Senioritis' primary symptom is a substantial reduction in academic effort which sets in toward the latter part of the senior year, and then rapidly escalates as "the end" comes into sight. It differs from many other diseases in that its sufferers are blamed for their own plight. However, they do not deserve the pejorative terms used against them ("you lazy bum" being one of the more sedate examples). They should rather be seen as responding in predictable, sensible ways to changes in both the benefits and the costs of academic effort brought about by dramatic changes in the educational, employment and social situations facing them during this time.
For those students going on to higher levels of education, the adverse incentives largely revolve around the fact that much of the convoluted application and acceptance process for more advanced study is completed well before the end of the senior year. Batteries of standardized tests (SATs, GREs, LSATs, GMATs, MCATs and other members of the alphabet soup family) have already been studied for and taken. Not only had that test preparation taken time and energy away from other course work, but any further knowledge acquired afterward will not improve the results. Letters of recommendation, which require that teachers have good impressions of the student when written, are history as well, and you don't hear of teachers going to the extra effort to write "I take it back" letters if that student's ensuing performance falls off. Perhaps most importantly, acceptance commitments are made prior to the end of the school year. This and the knowledge that once the next level of schooling has been completed, no one will ever ask for your grade point average at the lower level, causes the significance of grade point averages to plummet once you are accepted. Therefore, class performance becomes much less important than before (provided you succeed in actually graduating), and it suffers correspondingly. Since each of these factors reduces the benefits that students receive from academic effort, they sensibly respond by working less than before (however much or little that was).
Similar incentives confront those seniors who have chosen to pursue employment rather than further education (though, for many, getting and keeping a job will be quite an education in itself). If a job has already been lined up, then not only did the efforts devoted to job search take away from studying, but any benefits of learning related to getting that job dwindle. Further, if work has already begun on a part‑time basis, even less effort is left available for academics. If an acceptable job has yet to be found, then the process of filling out applications, running down (hopefully good) recommendations, going through interviews and days on the job, etc., raises the cost of studying in terms of the foregone alternatives, and students will predictably study less.
Graduation and the period leading up to it are also marked by dramatic social changes and the even greater effects of anticipating them. These adjustments, often highly traumatic, also siphon attention away from education. Many students will move shortly after graduation or may already be in the process, and preparations for and anxiety about moving, not to mention the difficulties of saying good‑byes or of pledging eternal friendships, drain energy from academics (although the fact that they actually must write some coherent sentences in one another's senior yearbooks may be a compensating advantage). Boyfriends and girlfriends have to make some serious decisions about their futures, and both breaking off relationships and making wedding plans are known to be more than a little distracting. Social activities increase dramatically as well. There are special ceremonies to attend, proms to prepare for, banquets to go to (and off‑the‑cuff speeches to get ready if the hoped‑for award comes through), and graduation parties to plan, enjoy, and recover from. Family celebrations, often including many of those relatives whose graduation gifts barely exceeded in value (if that) the psychic costs of seeing them, must also be attended. Both confrontations and accommodations with parents have to be worked out at well. And all of these raise the cost of doing school work.
Finally, by the end of their senior year, students are prisoners of their academic reputations. Those that have good ones find that it's a good time to try to "coast" on them a bit, since they don't need to worry about repercussions from teachers next year; those that don't find that the cost of overcoming them is too high for just one last term. All the seniors face this incentive structure, and they all know it. As a result, all students know that they can maintain their same relative standings with less work, and performances suffer as they focus instead on learning to "play the game" at the next level.
All of these incentives work in the same direction‑‑less attention to academics. But the result, senioritis, is not the fault of the seniors. It is the result of the system. So let's not be too judgmental of the ones we know. After all, most of us were seniors once (or twice) as well, and the most appropriate ending for, "When I was your age..." is "...I had it too."
We will never be able to eliminate senioritis, because these systematic end‑of‑the‑year changes in students' incentive structures will persist. However, we can take steps to minimize its adverse effects. One way is to assign substantial last term projects as graduation requirements, forcing students to use what they have learned. Another way would be by teaching students more that they can see is intrinsically valuable (and training them to see that there are real values that are worth holding), and less of what they see as a senseless and irrelevant hurdle that must be overcome solely because it is required before they get on with their "real" lives. To the extent we can succeed in this, the importance of grades alone as a motivating factor will fall, and the senioritis effects due to the decline of the motivation to get good grades will be reduced. But this result will not come from either berating or trying to reform the behavior of seniors; it can only come from an educational system doing a better job of what we want it to do. If senioritis is a major educational problem, blame the system rather than the students.
The Time Cost of a Consumption Activity
Edward Scahill, University of Scanton
Several years ago, the Chicago White Sox and the Chicago
Cubs were in the unusual positions of being in the thick of their respective
pennant races at the same time. As the summer months rolled along, both teams
reverted to their usual positions near the bottoms of their divisions. While
they were still playing well, an article in the Wall Street Journal noted the increase in attendance at the home
parks of both teams. The article also observed that many of the fans that
attended the Cubs games (on the north side of
After relating this part of the story, I ask why there appeared to be such large differences in the ages of the fans of these teams. After fielding a few possible explanations, I provide a hint: Wrigley Field (home of the Cubs) still is the only major league field without lights, so that all the home games of the Chicago Cubs must be played during daylight. Naturally, the opportunity cost of time is much lower for either a student on summer vacation or a retiree than for a fully employed worker. The full cost of attending a Cubs game, then, is very high for someone who works during the day, while the cost of seeing a White Sox game at night is much lower, even though the money prices of the tickets are similar for both teams.
NOTE: The Cubs installed lights a couple of years ago, much to the dismay of many people in the neighborhood.
Ralph T. Byrns
Elaborate on the time costs of consumption by discussing the time absorbed by vacations, movies or the theater, or exquisite dinners at four‑star restaurants. Emphasize that time is often as binding a constraint on consumption as income is, and that this accounts for the growing popularity of cheap, fast food restaurants such as the MacDonald's, the Colonel's, Pizza Hut, etc., even among affluent suburbanites. Another example: Gourmet meals that can be microwaved are absorbing larger shares of most grocery store freezers. This also explains why high monetary prices for airline tickets may be more economical than "cheaper" bus tickets or travel by private vehicles.
The "Best" Choice May be the Wrong One
Gary Galles,
Students very early learn in an economics course that an action is worth taking if the marginal benefits exceed the marginal costs. However, they often forget that at the time a decision is made, many of those benefits and costs are in the future and unknown, so that the proper decision rule is that, given the (incomplete) information at the time the decision is made, actions for which the marginal expected benefits exceed the marginal expected costs are worth doing, but you can be wrong if those expectations aren't met. As a reminder to students that what looked like a good decision at the time it was made may well not be when their expectations are not met, I give several illustrations, including: a) the decision to have your 27th beer of the night; b) studying very hard for an exam that turned out to be much easier than expected; c) trying new products that turn out to be duds; d) whether coming to class seemed worthwhile after the fact; e) blind dates; f) the relationship between the current international debt crisis and decisions made in the inflationary and rising oil price environment of the late 1970s; g) food poisoning (you wouldn't have eaten it if you had known); h) venereal disease and AIDS (again, if only you had known); i) selecting who to marry; j) selecting a career; etc.
After such a discussion, students seem to remember that since current decisions involve an uncertain future, decision making involves expectations rather than certainties. Thus, the seemingly best choice at the time may turn out to have been the wrong one.
Thomas J. Shea,
One argument about liberalizing anything that is illegal is that the increased availability of the good will actually reduce the demand for it. This reasoning has been used extensively in arguments for legalizing marijuana and "pornography". "Proof" is given by the fact that, where these goods were legalized, revenue went down. Using the concept of inelasticity of demand usually takes care of this question but still leaves some doubt in the students' minds. To solve this, use prostitution as the example. If prostitution were legalized across the country would the demand for it decrease? This will lead the students to realize that demand for prostitution is relatively inelastic. It will also give the students a better understanding of elasticity of supply. The very factors that are discussed as to why both buyers and sellers engage in such a market also leads to an understanding of the "other things held equal" parts of a demand and supply curve. Discussion will be lively.
David C. Huseman,
To determine whether students are "smart consumers", I provide a list of 30 items (described e.g., Heinz Catsup ‑ 14 oz.) and ask for estimates of their prices. After students make their choices, I then give the correct prices so that they can see whether their own estimates are higher or lower than the actual price. The goal is to make students more price‑conscious when they are in the marketplace.
Indifference Analysis
Would You Rather Have $100 or $125?
Jerome F. Heavey,
To help students understand preference theory and indifference curves and to help them resolve some apparent paradoxes, such as those which arise in the discussion of excess burden, I conduct simulated experiments of the following type. I will ask the class which they would rather have, $100 in cash or $100 worth of non‑transferable credit at the campus snack bar. I will repeat the question a number of times, each time increasing the amount of credit at the snack bar. The only rule is that each student must answer as truthfully as possible. In a section of forty‑seven students the experiment yielded the following information:
Amount of Number who Number who Number who
credit prefer cash prefer
credit have no preference
$100 47 0 0
$105 47 0 0
$110 47 0 0
$120 44 2 1
$125 40 6 1
$130 37 10 0
$140 35 12 0
$150 22 23 2
$200 5 41 1
It takes only a few minutes to run this experiment, providing an effective demonstration to the student of the logic of indifference curves. This is invariably followed by lively discussion in which students themselves point out such features as the following: (a) every student was able to state whether he/she had a preference or was indifferent between the two alternatives, (b) there were a number of cases where some students went from preferring cash to being indifferent, to preferring the credit, (c) some students went form preferring the credit without expressing indifference between the two, indicating that a point of indifference might lie somewhere between the observed increments, (d) all students were consistent, i.e., no one ever changed back to preferring cash once he had changed to preferring credit; (e) everyone agreed that a payment in cash is superior to a payment in kind when the two are of equal dollar amounts, (f) many students would rather have $100 in cash rather than a much larger payment in kind. These last two points are ones which few students will accept if they come as conclusions drawn from an indifference curve diagram describing some anonymous individual. These points seemed to be readily understood, however, when they were the outcome of an experiment in which the students had participated.
The Meaning of the Conditions of Consumer Equilibrium
William Sher,
(1) MRS = price ratio (2) decreasing MRS. Most students just try to memorize these conditions; they seldom understand their true meaning. Actually these conditions are not just mathematical results, but they are also meaningful in common sense interpretations. MRS between X and Y, say MUx/MUy represents the subjective view of the consumer toward the goods in question at the marginal for a given bundle of the two commodities. On the other hand, the price ratio represents the market opportunity that the consumer faces. If they are not equal, the consumer is not taking the full advantage of the market opportunities, thus the consumer can get higher satisfaction by adjusting the contents of the bundle for the same expenditure. When they are equal, this cannot be done. Hence, satisfaction is maximized. Remember that the MRS is a function of the quantity of each good in the bundle but the price ratio is a constant. Thus, when MRS is not equal to the price ratio, it is possible to make them equal by adjusting the quantity of the commodities. The situation may be illustrated by the following hypothetical situation. Suppose a super market sells only two goods, X and Y. At the entrance, each customer must declare how much he/she plans to spend (a fixed income), say $100. Then the customer is given a cart which contains $100 worth of merchandise, namely X and Y. The customer can take the merchandise and leave or may make any changes provided that the total worth of the goods must be constant, $100 in this case. Suppose the price ratio Px/Py is 2 which implies that the price of X is twice as high as Y. In other words, one can get 2 Y's if he gives up 1 X. This is the market opportunity. If the contents of the bundle of goods is such that the MRS is four, which means that the customer is willing to give up 4 Y's for 1 X due to too many Y's and too few X's in the cart, apparently he/she can be better off by giving up some Y and getting some X because one extra X can be obtained by giving up only 2 Y's while one is willing to give up 4 of them. By the assumption of non‑satiation, the consumer is better off. Remember the assumption of decreasing MRS: when more X and less Y are in the cart, MRS decreases. Thus, there is a tendency that the price ratio and MRS will approach equality. On the other hand, if the bundle of the commodities is such that the MRS is 1 which is less than the price ratio 2, this means that the consumer is willing to give up one X for one Y, but he/she can get two Y's for each X in the market. Hence, the consumer can be made better off by giving up some X for Y. In either case, when MRS is not equal to the price ratio, the consumer can be made better off for the same expenditure, thus satisfaction of the consumer is not at maximum for a given income. However, when MRS is equal to the price ratio, namely MUx/MUy = Px/Py, the consumer can no longer make himself better off by changing the combination of the bundle. Thus, satisfaction is at maximum for the given income.
Marvin L. Larson,
Economists have been fascinated with the utility that consumers receive since the days of Jeremy Bentham. We even attempt to derive a utility function for the entire society. In the principles courses, consumer behavior is addressed and dealt with using the ideas of marginal and total utility or marginal and total satisfaction. Many of us use the graphical analysis that is associated with indifference curves to assist us in explaining this abstract notion of consumer utility and his or her behavior in the marketplace.
Since the indifference curve represents a function of the same utility when two goods or services are considered all along the curve, I call that curve the Isoutil curve. It prepares principles students for the Isocost and Isoquant functions they will encounter in the intermediate microeconomics courses as well as those upper division courses that are oriented toward microeconomics. In addition, it may help students enrolled in the physical science courses who may have already been introduced to Isobars, Isotherms, etc., to apply this knowledge to one of the social sciences.
Let's Quit Drawing Indifference Curves
Henry Thompson,
If an artificial construction adds no substance and creates confusion among students, it should be forgotten. This is exactly what indifference curves do for microeconomics. It will come as little surprise to economists that all results of microeconomics can be derived without indifference curves, consumers simply optimizing utility along their budget. The principles of consumer behavior are, in fact, more intuitive and less cumbersome without indifference curves. Lagrangian optimization did away with the technical need for indifference curves, which only survive out of the mistaken idea that they teach us something. This note calls for their omission from current textbooks and blackboards. Income and substitution effects are easily illustrated by changing income to the level where the original bundle of goods could be bought. The Slutsky equation in no way depends on indifference curves. As economists with the job of teaching principles of the science to eager students, we should in practice forget indifference curves. They are a useless appendage, adding only confusion to a discipline which needs as little of that as possible.
Jonathan Sandy,
Intermediate microeconomics students need to see that "economics" is happening all around them. They just haven't learned to recognize it yet. Although they may grasp the intuition of demand and supply, the lighter side of the Pareto efficiency eludes the typical student. I have found that the following example demonstrates to the students that economics is at work in ways that are obvious only to the "initiated." First, I present the conditions necessary for Pareto efficient distribution formally with an Edgeworth Box diagram. We then discuss how difficult it would be to bring about Pareto efficiency for a social planner and whether they believe any mechanism could yield efficiency at all. At this point I introduce two separate diagrams with the appropriate endowments but add market prices to show how individuals, who are completely unaware of each other, arrive at a Pareto efficient allocation via utility maximization. This is an extremely important result, but the students usually see it as completely irrelevant because of the restrictive assumptions of the model. I assure them that even in the real world where there are many different goods and individuals, the Pareto conditions will still be met. I then present the following situation. Suppose you are up at the campus store trying to select the optimal quantities of Snickers bars and Haagen Dazs ice cream to buy given your budget constraint of $10, which your parents just sent you. As you stand in the frozen food section a beautiful stranger, gorgeous beyond description, strolls up next to you. You hang your head in shame because you know there is no way you could have anything in common with someone so beautiful. While you're staring at your shoes, you happen to notice that this beautiful stranger is also buying Snickers Bars and Haagen Dazs ice cream. You are both price takers and face the same relative prices. And then it hits you. You look at her straight in the eyes and say, "We've never met, but right at this moment we are sharing something very personal and very subjective and yet something of great social significance. You see, if you are maximizing your utility as I know I am, then we are equating our marginal rates of substitution and bringing about a Pareto efficient distribution of goods." I then suggest they try this line for homework. Hopefully, the students learn that the simple decisions which drive demand theory also yield efficiency.