Economists Do It With Models

I feel like I’m going crazy- this is backwards, right?

I’m pretty sure I was taught that one of the side effects of strong unions is that they discourage hiring, both because unions tend to lobby for above-market wages and because companies are hesitant to hire employees when they know that said employees will be difficult to get rid of. If you don’t believe me, ask France.

Update: In related news, this exists. Also, if you want to noodle on the pros and cons of “right to work” laws, I suggest you look into how to become a member of the Screen Actors’ Guild.

First off, HAPPY THANKSGIVING! I am very thankful that you all read my online ramblings

Once you get drowsy from eating too much Thanksgiving dinner (and no, it’s not the turkey, that’s mostly an urban legend, unless of course you ate the entire turkey), you should feast on what Dan Ariely has to say about giving:

Also, it’s a bit late for dietary advice, but in case you are curious how behavioral economists think about planning a Thanksgiving meal, this is totally for you. Actually, it should probably be for everyone, given that the average Thanksgiving dinner contains about 4,500 calories, or, for context, the recommended caloric intake for at least two days. If you feel like this excessive smorgasbord of calories has been getting more extreme as of late, it’s likely at least in part because the stuff that goes into making Thanksgiving dinner has gotten much cheaper in real terms over time.

Soooo…you may have noticed that I am writing rather than eating turkey and making awkward small talk with family members on this fine Thanksgiving day…that is largely by design, and the photos of the airports and train stations that have been floating around on the Internet suggest that my strategy is in fact optimal on a number of levels. (I suppose it also helps that I am not alone in choosing this strategy and that restaurants in Boston are more than happy to exchange money for turkey and stuffing…and cocktails.) Even so, I am quite pleased that Massachusetts is one of (I think) three states that has blue laws that prevent most retail establishments from opening on Thanksgiving. (Since Massachusetts is a small state, it’s probably helpful to know that the other two states with such laws are Rhode Island and Maine.)

But wait- shouldn’t I be against seemingly arbitrary regulation? Yes, and I am more than happy to explain myself…but let me give you some more Massachusetts fun facts first:

Until a few years ago, blue laws in Massachusetts stipulated that liquor stores in Massachusetts couldn’t be open on Sunday unless one of two conditions was met- either the store was located within 3 miles of the New Hampshire border (since liquor stores in New Hampshire were open on Sundays and it was easy for customers near the border to take their dollars out of state) or it was between Thanksgiving and New Year’s Day (I have no idea what the reason was for that one). Once discussions about repealing said laws began, many were surprised to find out that many liquor store owners were vehemently opposed to repealing the law. Their (likely correct) reasoning was that people knew that the liquor stores weren’t open on Sunday and, in most cases, planned accordingly, so opening on Sunday wouldn’t add a while lot to overall demand. It would, however, add to the store’s cost, so it would lower the store’s profits. (In other words, the store owners didn’t think that the incremental demand would cover the variable costs associated with being open on Sunday.) Furthermore, it wouldn’t make sense for a single store to refuse to open on Sunday, since customers could easily find one that is open and therefore don’t have an incentive to plan ahead. Overall, repealing the law was probably good for consumers but probably not good for producers.

Most of the same logic holds for stores being open on Thanksgiving, since both scenarios have the characteristics of a prisoners’ dilemma, or, more specifically, an arms race. Each store believes that it has to do what all the other stores are doing (or even more) or their customers will go elsewhere, so we end up in situations where stores are opening on Thanksgiving and trying to get people to shop rather than enjoy their Thanksgiving dinner. Consumers, for their part, see many deals that are either for a limited time or that will run out of stock quickly, so they (perhaps rationally) are compelled to forgo the turkey for the shopping sprees even though most of them would prefer to have a nice meal with family and do the shopping later.

The thing about both the prisoners’ dilemma and the arms race is that all parties are better off if their actions are constrained. In the same vein, Massachusetts is (probably unwittingly) being mostly helpful by constraining the actions of retailers- people can have their Thanksgiving dinner and still make it to the stores when they open, no one is cajoled into working on Thanksgiving (I get that this reduces labor hours, but the general consensus appears to be that retail workers don’t want to work on turkey day), and the stores aren’t likely to see their sales suffer, since it’s unlikely that the Thanksgiving shopping is actually incremental spending. (There’s not even really an incentive to go shop out of state, since customers will have the same deals available in Massachusetts on Friday morning.)

Or, in short, both Massholes and the businesses that they frequent should give thanks to their state government for helping to nip a coordination failure in the bud. Regulation that turns out to be useful- looks like a Christmas miracle came early this year. =P

This video reviews how to calculate costs and maximize profit in competitive markets and then discusses how to determine market supply and profit in the short run and how to analyze the transition to the long run. The problem is taken from Principles of Microeconomics, 6th Edition, by N. Gregory Mankiw, and is Ch. 14 problem #12.

You can find more practice problems via the Practice Problem of the Day category archive or by visiting the Econ Classroom page. You can also be notified of new practice problems by subscribing to the YouTube channel.

When deciding whether or not to read something, I tend to focus more on who the author is than on the specific headline. This probably explains how I came across an article by Hoover Institution fellow Paul Gregory and clicked on it without looking closely at what it was about. (As far as I can tell, Gregory isn’t a particularly big name or anything, but he does work on Russian economics, which is interesting to me since my family is Ukrainian. #thingsgregmankiwandIhaveincommon)

In retrospect, the title “Lee Harvey Oswald Was My Friend” probably should have tipped me off to the fact that the article was not actually about economics. In my defense, however, I can totally picture some super conservative economist being politically incorrect and using such a title for an article about how marginal tax rates during the Kennedy administration were too high or something. (While said economists would be correct that marginal tax rates were very high at that time- up to 91%, in fact, it should be noted that Kennedy was on board with lowering them but didn’t have the chance to do so because his plan got rejected by Congress, so the job was left to Lyndon Johnson instead.) Anyway, this article is probably more viscerally fascinating than anything about economics could ever be. No offense to economics, of course, but dude, how many people can say that they inadvertently insulted Lee Harvey Oswald’s writing skills?

Since the 50th anniversary of the Kennedy assassination seems to have brought the conspiracy theorists out of the woodwork, I think it would be totally appropriate for you to tell your boss that you have to leave work early so that you can go home and watch JFK.

Update: My hypothetical lack of surprise regarding economists making light of the JFK assassination was not without merit, in retrospect.

I suppose I am a fairly lazy employee, at least in a typical sense, since I do much of my work at home with the television on in the background. At night, this process generally entails reruns of The Big Bang Theory, since by this point I’ve watched the episodes enough that I don’t feel the need to give them my full attention. During the day, on the other hand, I usually have the television tuned to some sort of news channel. Today was no different, especially since I needed something to keep me at least partially entertained while grading exams, except that I found myself getting incredibly distracted by Obama’s presentation of the Presidential Medal of Freedom.

I won’t lie- I think it was either Oprah or Loretta Lynn that first got my attention (if you don’t love Oprah then I am convinced you are dead inside), but after a minute or so I noticed that behavioral economist Dan Kahneman was also on the list…so I started watching and then was late to class because I still had tests to grade. Sigh.

Apparently this award isn’t entirely unheard of for economists- a quick scan of the recipient list turns up Gary Becker, Milton Friedman, John Kenneth Galbraith (twice!), Alan Greenspan, and Friedrich von Hayek, but it’s still pretty neat- especially given that the award was instituted by John F. Kennedy, whose assassination took place 50 years ago almost to the day. (November 22, 1963, in case you are curious.) It was also pretty exciting (I am told I have a strange definition of exciting) to hear the phrase “prospect theory” on national television. Anyway, the 16 recipients in this bunch are a diverse and interesting group, and you can read a bit about each of them here.

From this, I can conclude that President Obama has at least a passing knowledge of prospect theory…which means it’s only a small logical jump to realizing that status-quo bias is a thing. Therefore, I am hoping that there was a conversation between Kahneman and Obama during lunch or cocktail hour or whatever that went like this:

Kahneman: So, Mr. President, I have a fun empirical result that I want to share with you.
Obama: Oh really? Do tell.
Kahneman: A test of status quo bias in a field setting was performed by Hartman, Doane, and Woo using a survey of California electric power consumers. The consumers were asked about their preferences regarding service reliability and rates. They were told that their answers would help determine company policy in the future. The respondents fell into two groups, one with much more reliable service than the other. Each group was asked to state a preference among six combinations of service reliabilities and rates, with one of the combinations designated as the status quo. The results demonstrated a pronounced status quo bias. In the high reliability group, 60.2 percent selected their status quo as their first choice, while only 5.7 percent expressed a preference for the low reliability option currently being experienced by the other group, though it came with a 30 percent reduction in rates. The low reliability group, however, quite liked their status quo, 58.3 percent of them ranking it first. Only 5.8 percent of this group selected the high reliability option at a proposed 30 percent increase in rates.
Obama: Is that from the paper that Richard Thaler keeps trying to slip under my door every time he’s over here nowadays?
Kahneman: It’s probably the same paper, yes, since we are both authors on it.
Obama: Ok- so what exactly is your point?
Kahnmen: Well…do you think we have any reason to believe that this result would change much if I were to replace “electric power” with “health insurance?”
Obama: Probably not, since status-quo bias doesn’t seem to be context-spec…ohhhhh, I see what you did there. Did Clinton put you up to this?
Kahneman: No sir…here’s my card with my contact information on it, and please feel free to hit me up when you are pondering policy choices that may be affected by behavioral biases and you can’t get ahold of Thaler. Also, here’s a copy of my book, in case you have a lot of free time coming up.
Obama: Thanks. *mutters something about the book making a good doorstop if nothing else* Seriously, did Bill put you up to this? At this rate, I am pondering honoring Kennedy’s legacy by instituting a Presidential Medal of Pain in the Ass and giving it to the two of you.
Kahneman: I approve, but only if you retroactively give one to Greenspan as well for that whole deregulation thing, sir.
Obama: That’s not the worst idea I’ve ever herd.
Kahneman: You’re welcome.

This video shows how to determine at what prices a firm will be making an economic profit and at what prices a firm will want to shut down. It also explains at what prices a firm’s supply curve will give positive quantities of production The problem is taken from Principles of Microeconomics by Dirk Mateer and Lee Coppock, and is Ch. 9 problem #5.

You can find more practice problems via the Practice Problem of the Day category archive or by visiting the Econ Classroom page. You can also be notified of new practice problems by subscribing to the YouTube channel.