Monday, September 01, 2014

Burger King

What purpose do cartoons serve?

In this cartoon, maybe the artist wanted us to drop our defensive guards and see that our governmental polices of taxation are garbage.

I believe that cartoons help us form an opinion about complex issues.

Cartoons even motivate behavior.  In this case to change corporate tax laws.

I think cartoons such as this one help to make connections between contradictory issues.  For example, the government needs taxes to fund public projects, but a tax rate this is viewed as unjust motivates corporations to outsource work.

The work of a political cartoonist is to help people come to some reasonable conclusions about the the complexity of a social issue.  This cartoonist made the issue of corporate tax avoidance easy to swallow.

Tuesday, August 12, 2014

Are You A Racist?

This excerpt is from Capital Ideas, by Alice G. Walton:

A poorly worded Twitter message landed the US Republican National Committee in trouble in December 2013. “Today we remember Rosa Parks’ bold stand and her role in ending racism,” the RNC tweeted. The predictable backlash was rapid and furious, noting that racism was, in fact, far from over. Hours later came a correction: “Previous tweet should have read, ‘Today we remember Rosa Parks’ bold stand and her role in fighting to end racism,’” the official handle noted.
The rest of the article is here.

In a study that has been repeated enough times to give validity to the claim, job seeking candidates with black sounding names were called to an interview less than those with white sounding names.  Judges give longer sentences, political candidates were thought to be black when their viewpoints contrasted with polling respondents, and white referees seemed to be biased against black until the bias was pointed out.

I know that the more interaction I have with people from different races, culture, and religion, the more my stereotypes disappear.

Wednesday, August 06, 2014

Time Warner Merger is a Monopoly

How many traits of a monopoly can you interpret from this cartoon in the recent issue of MAD?

1.  Less competition.  2.  Higher prices.  3.  Inefficiency.  These are a few I can easily pick out.

As an aside, for those interested in how people make choices under severe conditions of scarcity, check out, Orange is the New Black, and the 100 Foot Journey.  

Saturday, July 12, 2014

Sunday, July 06, 2014

Excel Problem -- Budget Equation and Indifference Curve

Wan allocates $20 to spend on Nuts and Berries.  Nuts cost $1 a package and berries cost $2 a clump.  Wan’s utility function for both goods is: U(n,b) = nb. 

1.        Use Excel to graph Wan’s budget line and indifference curve.  On the Y-axis, put Nuts.

2.       How many bags of nuts does Wan consume?


2.  Wan will consume 10 bags of nuts.

Income Effect?

Hi's family used more utilities than they expected during a rough winter.  This effectively made the family poor.  The higher bills acted as if there was a reduction in Hi's income.

As a result, Hi decides that they cannot take a vacation.  In economics, when a person's income falls and they consume less of a good, that good is a "normal good."

Of course, Hi's income really didn't fall. But he's going to consume less vacation.  Part of his reduction in vacation time is due to the income effect.

Simple Demand Project Using Excel

Wan is a utility maximizing consumer.  Wan has $20 to spend on nuts and berries.  Nuts cost $1 and berries cost $2.  Wan’s utility function is U(N,B) = NB. 

1.        Let’s find the quantity of nuts and berries that maximizes Wan’s utility.  If Wan spends all of his money on nuts, Wan can buy 20 packages of nuts.  If Wan spends all of his money on berries, he can buy 10 bunches of berries.  Wan has to make choices that have opportunity cost of forgone opportunities.  Complete the table below to see the combination of nuts and berries that will maximize Wan’s utility.  What amount of nuts and berries gives Wan the highest amount of utility?
Income = $20












2.        Suppose that Wan’s demand for nuts is given by: Nuts = $20/2Pn where P is the price of nuts.  Complete the demand schedule below.






3.       Using Excel graph the demand function.
4.       Using your demand schedule above, calculate total revenue at each price and quantity.
5.       Using the midpoint formula, calculate elasticity of demand in the price range $10 and $5, $5 and $2, and $2 and $1.  Describe the elasticity.
6.       Suppose the price of nuts increases from $1 to $2.  How many nuts will Wan buy now? 
7.       Given your answer in step 6, is this change in consumption a change in demand or a change in quantity demanded?
8.       Suppose Wan’s income doubles and the price of nuts is a $1.  How many nuts will wan buy now?
9.       Given your answer in step 8, is this a change in demand or a change in quantity demanded?
10.   Given your answer in step 8, are nuts a normal or inferior good for Wan?

The answers are here.  Scroll to page 2.  Page 1 is a reproducible worksheet.

An Excel template is here.  

What is learning?  I have written before that "Learning is a dependable change in behavior that isn't the result of maturation."  Yet, in the course of writing this lesson I learned things as a result of making mistakes and as the result of insight.  For example, the demand curve generated from the Cobb-Douglas Utility Function happens to be unit elastic.  This was an insight for me, but I should have known that the curve was unit elastic from the function.  In my definition, the insight that the demand curve is unit elastic is "learning" if it's a permanent change in my thinking.  Let's hope so.  

Sunday, June 29, 2014

Income or Substitution Effect?

In today's Blondie, a worker wins the lottery and quits his job.  Is this an income effect, in other words, does the worker consume more leisure or a substitution effect?  For it to be a substitution effect, the worker would have to work more.  Since the income is permanent, I believe that today's cartoon is an example of a pure income effect.  First, the lottery didn't change the opportunity cost of the trade off between work and leisure. The income is outside the model.  Second, the worker says he's going to retire.  The worker's admission guarantees that he will consume more leisure.  In this cartoon, the only effect that is relevant is the income effect.

Why Can't You Find A Good Painter In Late Summer?

Juan Carlos owns a local painting company, Tres Hombres.  One of his employees, Wanda, has been showing promise and acquiring new skills.  Wanda has proven that she can paint a straight line on a window, prepare the surface for a finish coat, and work with various materials.  Juan gives her a raise from her current wage of $10 per hour to $15.  The day after she earns a raise, she asks for time off.

Why would Wanda want to work less hours after she just received a 50% increase in pay?  You would think she would want to work more.  Juan might get frustrated with her and in anger say, "Good work is hard to find these days."  But, maybe Wanda is rationally reacting to economic forces.

In this post, I want to examine the income and substitution effects of a wage increase for Wanda.  I believe I can generalize Wanda's case to answer questions such as "Why a good painter is hard to find in late summer" or "Why you can't find a cab when it's raining."

Assume that Wanda allocated 16 hours a day for work and leisure.  She currently works 12 hours a day and earns $120 a day.  When she gets off of work she goes home to eat, clean her home, shop, pay bills, and watch her favorite television show on Netflix.  When she works 12 hours a day, she is at point 1 in the graph below.  When she receives a wage increase, she only wants to work 10 hours a day and earns $150 a day and consumes 6 hours of leisure.

The wage of increase increases her income and since leisure is a normal good, Wanda consumes more leisure.  Notice that Wanda moves to a higher utility curve.  If the wage increase is permanent, Wanda receives more utility (pleasure) by working less.

Economists decompose the wage increase into two stages.  In the first stage, Wanda would substitute more work for leisure.  Wanda would want to work more.  But since she now earns more per hour, she has to work less to buy the same things as she did before.  She now has more time to clean, shop, eat, pay bills, and even take up a hobby.  These effects work in opposite directions.  The substitution effects motivates Wanda to work more, but the income effect motivates her to work less.  Since the income effect is stronger in Wanda's case, she consumes 6 hours of leisure and works only 10 hours a day.

I think that when a good painter has many high paying jobs, the painter has the incentive to enjoy life more. This has the effect of making the painter scare.  A good painter becomes hard to find.  This also explains why you have to make a doctor's appointment so far in advance or why the golf pro isn't around to give lessons when you need her.

Wednesday, June 18, 2014

Market Failure in Education -- Free Riders

Let's assume that Wendi is a student at Madison Elementary School who is in the second grade.  Wendi comes from a family that values education.  Also assume that the Wendi's second grade teacher and her next year third grade teacher are excellent teachers, but her fifth grade teacher is just average.  Malcolm Gladwell has written that a good teacher can elevate a student's grade level by two levels.  So, in my example, the two excellent teachers can raise the reading level of Wendi by four levels by the time Wendi gets to fifth grade.

When Wendi reaches fifth grade, it's conceivable that she's reading at or above grade level.  Wendi's fifth grade teacher can be a free rider on the work of prior teachers.  Wendi's fifth grade teacher can also point the finger at Wendi's earlier teacher if Wendi doesn't come prepared for school.  I believe that a similar argument can be math about students entering high school with math and English skills.  I believe this gives  high school teachers an incentive to free ride on the work of others.

Market Failure in Education -- Institutional Practices

Institutional factors can dictate behavior within the school.  For example, suppose that AP Microeconomics can only be offered one period during the day because class enrollment mandates one section.  In order for the administration to accommodate the most students, the class is offered in the morning.  Bus schedules and lunch segments can also dictate where and when classes are offered.  How can institutional forces lead to market failure in education?

Let’s assume that Wanda is a utility maximizing student at Muscatine High School.  Wanda attempts to maximize utility and has well-defined preferences.  Her utility function is a Cobb-Douglas function in the form of: U(x,y) = X1^.5X2^.5.  Wanda wants to take classes that prepare her for college and two of the classes she wants to take are offered at the same time.  One of the classes is with Dr. Kreampuff , X2, and the other with Dr. Hardass, X1.  The price of taking these classes represent the relative costs of the amount of work, social relationships in the class, and the place in the school where the classes are offered.  Given these assumptions, Wanda’s demand for class X1 is: M/P1 – P2X2/P1 where M is income, P1 is the price of class 1, and P2 is the price of class 2.  Holding everything but the price constant, does Wanda maximize utility?

When the price of Dr. Creampuff’s class is $5 and the price of Dr. Hardass’ class is $10, Wanda will demand 3.5 classes where her utility is maximized. 

Wanda will maximize her utility with one class.  Let's assume that that Wanda has to take four classes to be a full time student and eligible for extra curricular activities.  We know that each successive class adds less and less utility so that marginal utility is downward sloping.  With four classes Wanda is located along a place on her demand curve that does not maximize utility.  I believe that 90% of the students find themselves in a place along their demand curve that does not maximize their utility.  Thus, the market cannot produce the optimal output of classes.

If students are rational and try to make the most of their education, they will substitute seat time in the classroom with online classes that allow a student to pick and choose the time they study.  Is it any wonder that more students are taking online classes?