Archive for category Microeconomic Muses
Should I stay or should I go? Marginal thinking in lunch, elevators, and foreign occupations.
Posted by The Marginalist in Microeconomic Muses, Personal on November 20th, 2009
When I was in high school, I almost exclusively hung out with an Asian clique. If you talked to me about diversity, I would have burst out laughing. Diversity in my group of friends meant two Indians and one half-white and half-Asian girl. Its not that I was racist. Its just people who did the things I did — math club, orchestra, and the gifted program — were so much more likely to be Asian. And I lived in the suburbs of Seattle.
Things are different now that I’m at Georgetown, a Jesuit private east-coast school that’s good enough to be Ivy. 90% of my friends come from private Catholic schools (my old friends consisted of atheists and a single protestant), and all but a handful are white. Five of them are named John or Jon. None of them are particularly stellar at math or play stringed instruments, but I love them just the same.
One of my best friends here is a guy on my floor named, um, Jon (surprise!). His friends were as white-washed as my friends were yellow-washed. He comes from a private Catholic school in Ohio. When I asked him if there were Asian people there, he said, “Well… there was that one kid, I think he was Vietnamese or something.” He’s tall, I’m short; he has hair, I’m Asian; he’s in the nursing school and I’m in the college of arts and sciences. The only thing we have in common is a love of classic rock. But we do a lot of stuff together. We watch The Office in my room, I chill in his room, we eat together, we take apart his roommate’s alarm clock and disable the snooze button together….
So, one day Jon and I decided to go to the dining hall — dubbed “Leo’s” — to feast on Leo’s famous chicken fingers, which are only served on Thursdays. Usually, the main fare for Leo’s is greasy, sauce-laden, and mostly unappetizing. But the chicken fingers are to die for. Chicken fingers are one of those things that brings everyone together here, like basketball, cursing the absence of a metro stop, and laughing at freshmen who live in Darnall. Two makes for a lonely lunch, so I called up another, Camilla, to join us. Unfortunately, life isn’t always perfect, and she seems to always be busy:
“Sorry, I’m working on a Chinese project and I don’t know when I’ll be done. I’ll give you a call when I’m done and if you’re still there we’ll have lunch, OK?”
Jon and I are already in the dining hall and we won’t be able to swipe back in if we leave. So, the question is, do I just eat with Jon and leave without waiting for her? Or do I wait? If I wait, how long do I wait? 15 minutes? 30 minutes? An hour? As long as it takes?
Yet another thing that brings Georgetown students together is Lauinger Library. “Lau” is essentially the second home of a Georgetown student. It’s home to the student-run coffee store “Midnight Mug” (they make a mean latte), sleeping public safety guards, and Michael Clark.
The entrance to “Lau” is on the third floor (the entrance to every building here is on the 2nd or 3rd floor, never the 1st). My favorite floor to study on is the 5th floor — it’s dead quiet and the chairs are comfy, but not sleep-inducing. Every time I went into Lau, I walked in, hit the “up” button on the elevator… and waited for ten seconds. “I’ll give it ten seconds,” I thought, “and if the elevator doesn’t come I’m walking. That’s all the time I’m willing to spend to wait for the elevator.”
It occurred to me the other day that this might be a massive waste of time. If the elevator doesn’t come, wouldn’t it be faster to skip the elevator and just walking? Or should I just continue waiting?
Let’s say the elevator takes anywhere between 0 and 20 seconds to arrive. On average, the expected waiting time is 10 seconds — sometimes it will take more time, sometimes less, but on average you’ll have to wait 10 seconds for the elevator.
After waiting 10 seconds, the elevator still hasn’t come. I now know it was a mistake to wait for the elevator, because I wasn’t willing to spend more than 10 seconds waiting for that elevator. I’m understandably upset by this — but should I just give up and take the stairs?
The answer, as you’ve probably deduced, is no. The trick lies in differentiating between sunk and marginal costs. Sunk costs are costs that are already incurred and no have impact on future decisions. Marginal benefits costs are what we need to worry about — marginal basically means the next step. Marginal benefits and costs aren’t incurred yet; we’re deciding whether or not it’s worth the trade-off.
In other words, forget about those ten seconds. They’re gone. They’re already spent. They’re not coming back. It doesn’t matter that you’ve wasted them anymore, because there’s nothing you can do about it. In fact, once you’ve spent 10 seconds waiting, it means you only need to wait between 0 and 10 seconds (an average of 5 seconds) more. Now that we’re ignoring that first ten seconds, which are long gone, all we need to focus on are those next seconds of waiting. And because I was willing to spend up to 10 second waiting, and on average I’ll only spend 5 more second waiting, it makes sense for me to just keep on waiting until the elevator comes.
Or, I can just choose to skip the elevator altogether and take the stairs. That, too makes perfect logical sense. So the most rational options are to either skip the elevator, or wait until the elevator comes. But it never makes sense to just sit there and wait for a certain amount of time.
Put it this way: If waiting for 1 second is worth it, then after that first second is gone the next second must be worth it as well. And so on and so on, until the elevator has come.
—
Should we pull out of Iraq?
I can’t say. I don’t know the answer. But I know how to think about the question.
Proponents of pulling out sometimes point the past and say, “4,000 lives is enough.” We’ve lost so much blood and treasure here that it’s no longer worth staying.
Proponents of staying say, “look at all the lives we’ve sacrificed in Iraq. To go would waste all of those lives.”
Both are wrong ways of looking at the problem. The 4,000 lives spent are, well, sunk costs. I think it was a terrible mistake to invade in the first place, but it’s not like we can take that back anymore. All that matters now is the additional — the marginal — lives and resources compared with the marginal benefit (if any) of staying in Iraq. I think the answer is that it’s not worth it, but I’m not going to pretend the answer for sure. But I do know that pointing to the lives and treasure already spent trying to stabilize the country is not a rational thing to do for either side.
—
There’s one caveat in the elevator problem I’d like to point out, though. We’re dealing with average expected waiting times, not set
At least I got to eat these delicious chicken fingers.
waiting times. There’s uncertainty involved. The best strategies, which I’ve outlined, are simply strategies to best manage these risks. On average, they will yield the best results. But since uncertainty is involved, there’s always a chance that you’re really choosing the wrong strategy.
I thought about “giving Camilla” 10 minutes, but I had a hunch that the best options for me were to either wait indefinitely until she arrived, or not to wait at all. I had no idea when she would be done, and I had a paper to write. So Jon I left… and not three minutes after I walked out of the dining hall, she called me and asked if I was still at the dining hall. Uncertainty’s a bitch.
Signaling, Value, and Common Room Refridgerators
Posted by The Marginalist in Microeconomic Muses on October 27th, 2009
One of my guilty pleasures is reading My Life Is Average, a spinoff of FML. Take this one, for example:
This weekend, I put my fridge out on the street with a “Free” sign. No one wanted anything to do with it. Then on a whim I replaced the “Free” sign with a “$50″ sign. Next time I looked out on the street it was stolen. MLIA.
Oh, MLIA. You’re so much better than FML. The economics of this one are pretty simple. A “free” sign indicates that the refrigerator really worth anything, so no one’s willing to take it. The $50 sign says, ” hey, this thing is worth something. It’s worth stealing.” And with no security to protect it from being stolen, voila. It’s gone the next morning.
But let’s say you don’t want your things stolen. There are two ways of preventing this from happening.
1) Make it hard to steal. That’s what safes, locks, and armored trucks are for.
2) Decrease the incentive to steal. Make your stuff seem worthless.
One example comes from a site I also really enjoy reading, Lifehacker. Lifehacker is, in a nutshell, a quirky and nerdy site that’ll teach you clever uses for binder clips, point you to free downloads and applications to boost your productivity, and give you pointers, tips, and shortcuts to making life more efficient and cheaper — all with a hint of McGuyver (turning binder clips and rubber bands into a cool pencil holder, for example). One of their tips is a great example of signaling: The uglified camera.
What a great example. An uglified camera makes it look, besides aesthetically unpleasing, that it wasn’t very well cared for. It gives the impression that the owner didn’t really care for the camera, and therefore it’s not worth a whole lot. Maybe worthless enough that it really isn’t worth stealing.
Is this the best defense against protecting your camera? Of course not. Method 1 is. Keep your camera in your pocket. Uglifying your camera can help if you accidentally misplace it, but there is of course no substitute for security. But sometimes security isn’t always there.
Here at Georgetown, for example, there’s one kitchen for every floor of the freshman dorm. In each kitchen there’s a communal refrigerator/freezer. No one has a freezer in their own room (due to university restrictions on what can be kept in your room), so most frozen foods are kept in the communal freezer.
One day, I saw a sign taped to the freezer door that said something along the lines of:
To whoever took my ice cream, my mother spent $10 on that at Whole Foods to get it for me because she knows I like it. That meant a lot to me and I hope you will have the heart to go to my room and reimburse me for it. — [Room number]
I doubt whoever took the ice cream was the kind of person to go back and give the poor girl $10. The kind of person to take ice cream is not the kind of person to do that sort of thing. But I’m willing to bet the girl just put the ice cream in the freezer without a little thought to how to stop people from stealing it. This is the situation in which the first method — security — of preventing theft is not available.
I would have put the ice cream in a paper bag. Paper bags in the freezer are inherently less attractive than tubs of ice cream. But people can be curious, and someone looking to steal something will most definitely look inside the paper bag. So I would label it something, something to make the would-be thief think it’s something unappetizing. “Preston’s ground beef.” Most would-be thieves aren’t looking to steal ground beef, and probably aren’t willing to look inside when there are other parts of the refrigerator to explore.
This isn’t a guarantee. Ice cream in the common room is pretty risky. A smart thief will think to look inside. But it’s better than just leaving it in the freezer for all to see.
So I gave a little thought to how I would store something in the communal fridge. I’d just bought some squid and managed to harvest the ink after cooking the rings. Squid ink, for anyone who knows how to cook, is extremely valuable and makes for a great meal.
Usually someone would label their food and say “do not touch” in hopes that no one would steal it. But that only works if people are nice. If not, a post-it note that says “do not touch” really says, “This thing is worth stealing, worth it enough that I labeled it.” So instead of putting a note on my container of squid ink that said “Do not touch Preston’s squid ink,” I just let my tupperware container of squid ink sit, unmarked and unguarded, in the common room refrigerator. It drew no one’s attention and no one knew that something so valuable was inside.
Days later, I treated myself to some great squid ink ramen.
It's better than you think
How an Econ Student Goes Busking
Posted by The Marginalist in Busking on October 10th, 2009
I’ve been talking a lot lately — ranting, actually — about politics . Health care, climate policy, and whether or not Obama deserves the Nobel Peace Prize are all incredibly interesting topics to be sure (if you’re an economist).
But they’re not fun. Lately I’ve been losing track of the fun side of economics. I’ve been letting the political economic side of me take over the fun economic side of me. Part of it is I’ve been doing a lot of political trouble-making lately with my campus group Hoyas for Liberty. But this idea has been kicking around my head for a while, and it’s probably a lot more interesting than why Cap and Trade isn’t economically efficient.
You know how everyone’s been through different phases of their childhood where they wanted to be an astronaut,
firefighter, or a doctor? I went through the same phases (except with Pokemon trainer, violin teacher, and paleontologist). But now I’m pretty sure I know what I want to be: a professor.
I want to be this guy
I’m not really sure what it is. Maybe I’m just scared of a normal private sector job. I’ve always liked being in school, and I’ve always loved to learn (a cliche, but true). It just feels like the natural thing for me to do. But being a professor and writing those papers and molding the minds of future generations just seems… exciting.
But you always need a Plan B if things don’t work out the way you want them to. My Plan B is… street performing. Okay, maybe it’s not Plan B (maybe Plan D or E or F…) but it’s not the worst job in the world.
The first time I went street performing was in April, when I asked a very sweet and cute girl to prom (in what might be described as an over and unnecessarily dramatic fashion). Long story short, I serenaded her as a street performer.
"Help me take a cute girl to prom"
As it turns out, I was looking for a job at the time — and busking paid pretty far better than any other job I could find. I’d found my summer job. Every few days I’d take the bus down to Seattle’s Pike Place Market, open my case, and hope for tourists to drop a dollar or two into my case.
One difference between street performing and a regular job is the risk and irregularity involved in street performing. Most of my friends that had jobs that summer would go to work knowing how long they’d be working for, and at what rate they’d be paid at the end of the day. Not so for a street performer: Every day, I could go out and expect to play for 2-3 hours that day, but exactly when and where (some places paid better than others) was a mystery. My pay was completely subject to the whims of my audience. How much I got paid would depend on how well I was playing, how many tourists there were, their moods, what kind of competition I had that day, and a host of other factors.
Or, look at it this way: the reason why street performing is a risky business is that you offer your product with no guarantee of being paid back. In fact, each individual audience member has absolutely no financial incentive to give you money. Whether or not one person gives a street performer money is not going to influence whether or not he keeps playing.
In fact, now that I think of it, what this really is, in theory at least, is the prisoner’s dilemma. Look at the following table:
| You\Them | Pays | Do not pay |
| Pays | Busker plays, but you have to pay | Busker plays, but you have to pay |
| Do not pay | Busker plays, you don’t have to pay | Busker does not pay |
Imagine you and a group of people are watching a street performer. You all like him, and you would be willing to pay to keep hearing him play.
If everyone says, “alright, I’ll pitch in a dollar,” the busker keeps busking. Everyone’s happy, but a dollar poorer.
But people are naturally selfish (self-interested, if you prefer). People are going to think, “alright, everyone else is paying, which means the busker will keep on playing. Even if I don’t pay up, I can still enjoy the music.”
But there’s a trap here when too many people think this way. At some point, if too many people don’t pay — they “deviate” or “shirk” — the busker stops playing, and no one gets to enjoy the music. In fact, because everyone acted selfishly, everyone’s worse off. Economists call this the prisoner’s dilemma — when people acting in their own self-interest makes everyone worse off.
The greatest trick of the street performer is not the music they perform or the magic they can show you. The greatest thing the street performer does is to get people to give them money against their financial self-interest.
iPhones, Pharmaceutical Companies, and Expenses
Posted by The Marginalist in Microeconomic Muses on August 5th, 2009
I got myself an iPhone the other day — quite possibly the niftiest piece of technology I’ve ever held in my hands. It’s slick, easy to use, and the picture quality is pretty damn good. I used to carry around a Hipster PDA, my phone, and an iPod before, but now that can all be consolidated into just one item. Which leaves me, of course, with more room to carry around the one dollar bills I earn from street performing.
Needless to say, the innovation of Apple has greatly improved my life. By the way, why do you think Apple made the iPhone? Profits, or altruism?
Anyways, Megan McArdle points out that Apple only spends 3% of its revenues on research and development. Google spends about 10% on research on development. So when people complain that pharmaceutical companies “only” spend, say, 15% on research on development — is that really such a big complaint?
Monday Mini Muse: Money (MMMM for short?)
Posted by The Invisible Hand in Microeconomic Muses, Travian on August 3rd, 2009
This post is intended as an add-on to the earlier post on money.
I wrote earlier that anything could be used as money so long as people generally accepted it as payment for goods and services. What I didn’t answer before is why some objects (such as gold and silver) have been used for centuries by many civilizations as money while others (such as leaves) have not. This is the question with which I will concern myself today.
There are three qualities which make a substance useful as money: value, fungibility, and liquidity.
[Value]
For something to be accepted as money, it must obviously be of some value to people, for money is a representation of wealth. This is why dog excrement has never been used as currency by any recorded civilization in human history. Value entails relative scarcity — this is why precious metals were used as money: in addition to being coveted by people for their physical beauty, they were sufficiently rare in supply that their value would remain stable over time. This ensures that they act as a good store of value over time and that they make for a good unit of account. Gold and silver are impossible to mass produce, unlike, say, Oreos, which would quickly lose value if used as money.
For fiat money — like paper money we use today — the government must be careful to maintain the currency’s value by cracking down on counterfeiters and by not engaging in government-sponsored counterfeiting (i.e, printing money). The mass production of any type of money, fiat or commodity, causes rampant inflation which destroys the value of money.
This is why inflation is sometimes called the worst type of taxation; it is essentially a tax on information, a tax which destroys peoples’ ability to tell how much real wealth they have and how much goods and services really cost.
[Fungibility]
Fungibility is the second main criterion for a substance to be useful as money.
Fungibility: The quality of having interchangeable units.
Examples of fungible goods are corn, gold, and crude oil. A bushel of number 2 corn is the same as any other bushel of the same grade of corn; this is why farmers are able to deposit their grain into grain elevators without worrying about whether the individual pieces of corn or wheat that they put in are the same as the ones that are withdrawn at a later time. Similarly, a barrel of crude oil is the same as any other barrel of crude oil and ingots of 24 karat gold are interchangeable.
Why is fungibility important for money? Suppose that horses or diamonds are used as money in a certain economy. Clearly, both are very valuable, but they are not fungible because one horse or diamond does not have the same value as any other horse or diamond.
Each horse has its own individual draft power and endurance and each diamond has its own luster and size, among other characteristics. In trading, the buyer and seller must spend precious time and energy in bartering over how much each horse or diamond is “really worth”. This time represents an unnecessary transaction cost that could be eliminated by using fungible money.
Fungibility goes hand in hand with divisibility. Units of fungible goods can easily be divided into smaller units or combined into larger units without losing or gaining a disproportionate amount of value. For instance, two bushels of grain are worth twice as much as one bushel, and an ingot of gold can be split in half by a goldsmith to produce two pieces of gold, each of which is half as valuable as the original. By contrast, splitting a finished diamond in two or smashing two diamonds together would utterly destroy the diamonds’ value. Horses aren’t that divisible, either.
[Liquidity]
Liquidity (or more specifically, market liquidity as distinguished from accounting liquidity) is the final trait that any substance which is useful as money should possess.
Market liquidity: How easily and quickly an asset can be sold without losing value.
Cash is the most liquid asset in existence because its exchange does not affect its value at all. By contrast, houses and cars are very illiquid assets. When a car or house is first sold, for instance, it cannot be immediately resold except at a much, much lower price.
This is because the act of putting a car or house up for sale sends a clear message about its value: it tells other people that the asset in question is worth so little that the original buyer did not want to keep it for very long. That’s why used cars are much, much cheaper than new cars, even if the used car has few miles on it.
Because of this, cars and houses cannot be turned over and used as payment in the short run. In the long run, though, they may offer a stable store of wealth provided that there are no major upheavals in the housing and car markets.
[Conclusion]
I lied. Well, I kind of only told half the truth. Yes, anything could, I suppose, be used as money, but in practice, only liquid, fungible, and valuable objects are ever accepted as money in any economy.
I will advise my enemies to savor this moment, for from here on out, I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me Adam Smith.
Fun Tax Lesson of the Day
Posted by The Marginalist in Microeconomic Muses on July 20th, 2009
So, as many of you might know, I busk on the side to make a little cash when I have the time (I’m currently not employed). I’ve been out three times and I’ve made a couple hundred dollars, which means I’m getting close to having to legally pay income taxes. From the IRS site:
You must pay SE [self employment]tax and file Schedule SE (Form 1040) if either of the following applies.
- Your net earnings from self-employment (excluding church employee income ) were $400 or more.
- You had church employee income of $108.28 or more.
One wonders, of course, how they came up with the number “$108.28 for church employees. But I’m not a church employee, so let’s ignore that for now.
If I make $399, I don’t have to pay income taxes. I pay income taxes when someone drops that extra dollar into my violin case.
Let’s say I made $400. I’d pay income taxes of 15.3%, or $61.20. Which means that extra dollar would actually reduce my income by $60.20. It wouldn’t make any sense for me to keep playing after that. If I made $471, taxes would take away enough money to leave me with $399.
I earn about $45/hour busking at farmer’s markets. $399 takes me about 9 hours to make. $471 takes me about 10.5 hours. So apparently working 9 hours and 10.5 hours leave me with the same amount of money. Fun. Which one do you think I’d choose?
For fun, let’s throw in a poorly-made (Graphmatica + Paint) graph of self-employment.
Notice: If I receive $450 in tips, I end up with less money than if I received $399 in tips.
OK, OK, most people are making more than $400 a year and don’t have to worry about this kind of stuff (of course, yours truly has to worry about it!). It’s not likely that many people are going to be hit by this aspect of self employment tax policy. But it just goes to show: taxes discourage work.
Work is production — I produce a service (music) that improves the well-being of the people who I give it to (no, I’m not being arrogant about my music. I know this because people give me money when I play, so they obviously either have immense pity or immense admiration, and I’d like to believe the latter).
Ergo, taxes discourage production. If you want less of something, you tax it.
Monday Muse: Travian and the Need for Money
Posted by The Invisible Hand in Travian on July 13th, 2009
This is my second post about Travian. As you can see, I find it really fascinating; it’s chock-full of post fodder, too 
I was playing Travian again the other day and I realized I was short on wheat. I headed over to the market to buy some, in exchange for resources which I possessed in abundance, and I happened upon the familiar list of players who were offering certain amounts of some resources in exchange for certain amounts of other resources.
One of the first deals I saw was a guy offering 300 wheat for 350 wood. I thought that was a pretty good bargain, until I saw another fellow offering 400 wheat for 400 iron. Because I only had around 300 iron, I realized I would have to trade in some wood or clay for some extra iron, first.
But then, I would have to consider all the possible transactions for those resources and so on, leading to an increasingly complex web of sales and purchases.
My next thought? We need some money in this market.
Pizza Parties, P. 2: Supply, Demand, and Shortages
Posted by The Marginalist in Pizza Parties and Markets on July 6th, 2009
Last time I wrote about what I thought would be the best market arrangement for a high school pizza party. If you recall:
- Students would buy as many pizza slice tickets as they like. The price is exactly equal to the cost, to the teacher, of a slice of pizza (let’s say it’s a dollar).
- The teacher collects the money and orders an amount of pizza exactly equal to the number of tickets bought.
- After the pizza is ordered, if someone bought too few or too little slices of pizza, they could buy or sell their pizza permits on an open market.
I thought I wouldn’t be able to write more about the economics of pizza parties, but it turns out that pizza parties are a great way to think about markets. I have not only this post, but another post on the way about pizza party markets.
Today I want to write a little bit more about the pizza ticket market. Last time I wrote that if too many people over-order tickets, then there’d be a surplus of pizza; if too many people under-order tickets, there’d be a shortage of pizza.
That’s wrong. Here’s why.
Monday Muse: Travian and the Sanctity of Contracts
Posted by The Invisible Hand in Travian on June 29th, 2009
RECENTLY, I started playing (read: got addicted to) an online browser-based game called Travian. Travian is a real-time strategy game with elements of city-building games such as The Sims and of turn-based strategy games such as Civilization, but no client is downloaded or installed and your village coexists with those of thousands of other players.
Travian is rife with economics-related concepts, such as the challenge of reconciling infinite wants with finite resources and the mutual benefits of free trade. In addition to gathering resources and creating buildings, players can also interact with each other in the game either through peaceful trade or through military force. It is from this dichotomy of interaction that an interesting conundrum arises, and it is that quandary which I will pursue today.
(Early) Monday Micro Muse: Mrs. O’Brien’s Pizza Party
Posted by The Marginalist in Microeconomic Muses, Pizza Parties and Markets on June 19th, 2009
[I'm Free!]
TODAY I graduate from Interlake High School in Bellevue, Washington. I am finally free from the public school system!
On Thursday, my English Teacher, Mrs. O’Brien, threw a pizza party for us. Throughout high school, I’ve noticed that pizza parties are notoriously difficult to do. Some people end up eating one slice, and some people will wanna eat half the pizza.
It’s difficult to know exactly how much pizza everyone will want. It’s difficult to know how to charge people. So, when Mrs. O’Brien had boxes upon boxes of pizza and no clear strategy to pay for them, it got me thinking… what’s the best way to have a pizza party?
Ideally, we’re looking for:
- The teacher to be completely reimbursed for the pizza.
- All the pizza to be eaten, but no shortage of pizza (for you econ nerds, we want the pizza to “clear the market.”)
- A fair payment system.
Well, sometimes I wasn’t really paying attention in English (daydreaming about econ), so in return I’ll help Mrs. O’Brien out and prove that economics is actually pretty damn useful. Here are my thoughts on how to run a pizza party….