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? 

Tuesday, June 17, 2014

What is a school?

At the HNI Shareholders meeting in May, I was drawn to a discussion about the effectiveness of home schooling.  One gentlemen opined that home schooled children receive an excellent education in subject matter, but no socialization skills.  For this person, a school is a socialization institution.  For this person, a school is more than learning to read, write, and acquire mathematical skills.

In The Seven Habits of Highly Effective People, Steven Covey writes about a fish, bird, and a squirrel who start their own school.  The Fish earned an A in swimming, but failed flying.  The bird earned an A in flying, but failed swimming.  The point of the fable is that schools should have measurable outcomes, but some skills just can't be learned.  I like to say that, "You can lead a horse to water but you can't teach him the backstroke."

On Sunday's our high school is used to host a church service for a congregation that doesn't have a building.  On election day, the schools are used as a polling place. Some children attend school so that they can compete in athletics, or get music lessons, or participate in school plays.  For these people, the school is a vehicle to another objective.

When a new steel processing business located near our town, we changed our curriculum to train students to for employment after graduation.  For these students school was a preparatory institution for a career. 

In the 1980s the AIDS virus was a major malody to society.  The schools were used to educate the population about the virus.  In the early 1960s, schools were used to administer the polio vaccination.  Schools are used to institute social change to teach safe sex, the hazards of smoking, and the evils of drug use.  Schools were used to change societal attitudes. 

A school is all of these things.  So when you send a child to school, what is being taught? Schools have different objectives depending on the student.  Is it any wonder that when Johnny comes and his mother asks him what he learned in school, Johnny says, "nothing."

Market Failure in Education -- Monopsony

A Monopsony is a single place to work in a geographical area.  The textbook example is a mining town.  In this town, most men seeking employment had to work in the mine.  There might have been one job at the company store or one job driving the company train, but the mine was the only place to work.  In Coal Miner's Daughter, a moonshiner tells a veteran returning from WWII that you only had three choices when you lived in his town:  you could moonshine, work in the coal mine, or get on down the line.  If you were a moonshiner, you would eventually get shot.  Most wanted to stay because they had family in town, so they worked in the company mine.  How does a monopsony result in market failure in education?  Suppose that a wife moves to a town with her husband who is a president of a large corporation.  If the wife is a teacher, she will probably want to find employment in a school.  If there is only one school to work at in the town, then the school becomes a single employer of labor and a monopsony.  The laborer is now employed in an occupation with little mobility, less than competitive wages, and the incentive to underperform.  This is not to say that every teacher underperforms, just that the incentive is there and this is one source of market failure. 

Market Failure in Education -- What is Learning?

When the teacher and the learner have different expectations of capabilities and content, the classroom will fail to produce valid and reliable results.  Here is my addition:

Learning is a dependable change in behavior that is the result of a meaningful experience that isn’t the result of a reflex or maturation. 

I believe that public education fails because of asymmetrical information.  Even the definition that educators use is asymmetrical.

What does it mean to say “I learned …”?

I begin our discussion by tendering a functional definition that I use in my classroom.  I admit that this definition is impoverished since it is tailored to meet the needs of a business education classroom. 

Learning is a dependable change in behavior that is the result of a meaningful experience that isn’t the result of a reflex or maturation. 

Suppose that Bill teaches his son to ride a bicycle.  Bill selects a bicycle that this the right size and appropriate for a boy that is Bill’s son age.  When Bill is through teaching, he can observe his son Juan riding a bicycle safely, without falling and riding the bicycle up and down a hill.  If Bill has taught for transfer of learning, Bill can substitute different size bicycles.  Bill can observe his son riding his bicycle at different times during the day.  Bill can say that his son has learned how to ride a bicycle because his son has exhibited a permanent change in behavior that his reliable.

Now, let’s change the skill that Bill’s son is learning to a skill that is not a motor skill, but a cognitive skill.  Motor skills like walking, throwing a baseball, or riding a bicycle don’t change much from the initial acquisition.  Motor skills differ from cognitive skills since cognitive skills are subject to forgetting, are difficult to transfer learning, and difficult to assess acquisition, retention, and recall.

My definition tendered above lacks an adequate explanation in explaining permanent changes in behavior in cognitive skills.  An example will show what I mean.

Economics attempts to attribute a mathematical model to human behavior.  For example, how does a laborer interact with capital?  Suppose that after thousands of observations of how unskilled labor interacts with a tool to produce smoke grinders, economists derive the formula: f(x,y) = AL^.5K^.5, where A is the state of technology, L is unskilled labor, and K is a tool. 

If technology changes, technology can disrupt how labor interacts with capital and the amount of smoke grinders that the laborer can produce will change.  But there are other questions to consider.  What happens when labor acquires education or more skills?  What happens to output when capital used to make smoke grinders improves?  If learning has taken place, the learner can make predictions on how changes in technology, learning, and capital improvements will change output.  This learning is a higher level than the skill of riding a bicycle.  This is a cognitive skill that requires the learner to connect the dots and make connections among variables.  Some teachers call this “insight” or a “ah ha” moment.  Is this insight learning or is insight a result of learning?

Now our definition of learning becomes more complex.  An improved definition would include insight.

A teacher who cares about their students will want to prepare a student for a career, post-secondary education, or learning to enable more learning.  A teacher who is teaching for transfer of learning or a post secondary education, requires the learner to employ higher order thinking skills, HOTS.  I believe that HOTS are synonymous with the pyramid structure of Bloom’s Taxonomy.  For example, different classes such as drawing and painting, requires creativity along with simple color mixing that integrates all levels of learning from rote memorization to synthesis and analysis. 

A biologist might say that biological changes happen in the cells that act as evidence of learning.  If biological changes occur in the mind or cells, then all actions result in learning.  Even actions that are mistakes is considered learning.  So when a watercolor artist learns how much water and paint to load on a brush by making mistakes.  An economist learns how labor and capital interact by making several mistakes in deriving an equation that relates the interaction between labor and capital.  Perhaps, this is discovery learning. 

Discovery learning is a by-product of attempting to learn a skill that is the same as insight.  So I end how I started. 

Learning is a dependable change in behavior that is the result of a meaningful experience that isn’t the result of a reflex or maturation.