Marginal Costs!

Freakonomics discusses the pricing strategy of omelets, focusing on the marginal cost!

The Price of Tickets to Hampshire Halloween

The Price of Tickets to Hampshire Halloween

by Mindan, Yanni, Jiayi, and Syeda

The price of tickets to Hampshire Halloween was $20 this year. Given how we are in a perpetual financial crisis given our very limited sources of income as students, it seems to us that the tickets are over-priced. So for the sake of this article, assume that $20 is above the equilibrium market price for Hampshire Halloween tickets. It is reasonable to think that colleges would have two reasons to over-price tickets. Firstly, to lower the number of party-goers to sustainable levels so that there can be better management. Secondly, to raise revenue by charging a higher price (this is only true if demand is inelastic, which we claim it is) to a small number of more financially-solvent students. In this economic explication, we will give reasons to show that over-pricing possibly defeats both aims.

The first purpose is defeated because they did not have enough mechanisms to prevent a substantial number of students from attending the party without buying tickets. First, there were surmountable physical barriers to entering the party. Desperate party-goers could go to Hampshire before the fences were put up at 4:30 pm and simply stall for time by studying or chatting with friends until the party began. They could also walk across the large field from Atkins Market to the area of Hampshire college campus where most of the residential dorms are. Second, the wrist bands which were provided to party-goers were such that nearly perfect substitutes were available. They were a bright neon pick (like most handouts from health centers or counseling services) and they did not even have any distinguishable writing on them. For adventurous students with the ability to take calculated risks, this was a pretty fun challenge to overcome. Reasonably assuming there is a significant number of such students in the Five College area (the colleges are competitive) and a significant subset of those students do not have the financial means to attend the party, there were probably a lot of people who crashed the Hampshire Halloween party! So, the crowd would be larger than what the management thought to be sustainable levels and this is portrayed by the fact that buses within the Five College area ran horribly late on the night of the party, ran a few trips outside of schedule,  and they were definitely over-stuffed with passengers. Slight digression: one of our teammates had to wait for an hour in the freezing cold at a pitch-dark, desolate area for the last bus from Amherst to Mount Holyoke, which was supposed to arrive at 1:48 am but finally showed up at 2:35 am. The night was chilly and she caught a terrible cold afterwards.

The second purpose is defeated by simply hypothesizing a possible Laffer curve for the Hampshire Halloween market. We believe that the $20 price is such that the revenue is not maximized. Given the popularity of this particular event, most college students feel that it is an experience they ought to have at least once as a student of the Valley, even if they usually do not party. So it makes the demand somewhat inelastic when compared to other college parties. So possibly the only reason preventing college students from attending Hampshire Halloween would be the ticket prices. Now how many students can afford to pay $20? Thinking of the wage rate, this equals 2.5 hours of work for most students and the maximum work hour is 10 and median work hour is 8. Given how all other college parties (except for Vegas Night), charge about $5 maximum, this event is just 4 times more expensive! Even if it retains more students than the average parties would after a price hike due to the relative price inelasticity, it is reasonable to assume that a much greater number of students would have attended if the price was lower. Even though we cannot derive the revenue maximization price, we would bet on the fact that revenue would be maximized if the price was around $10, if not $5.

There is a strong case to argue then that the Hampshire Halloween ticket prices should be lowered. This would give authorities and management a more accurate estimation of the number of party-goers as a much lower number would be tempted to risk sneaking into the party. This will allow them to provide better services so that people, like our teammate, do not have to suffer for things like a bus ride back home. Also, lower prices could potentially provide the greater revenue to buy additional resources for the larger party-crowd. Everyone seems to be better off. This event is a great example for illustrating the desirability of market equilibrium (prices and quantity) as it is only then that society is most efficient, with no economic losses. When prices are forced up, there is necessarily a lower consumer surplus, deadweight loss and loss of welfare. We rest our case.

What to do with lots of cold air?

Marginal Revolution discusses how Sweden provides cost advantages due to cold air, here.

How do firms choose prices?

Cheap Talk looks at how Netflix's new pricing scheme caused Red Box to alter prices, here.

Halloween Agglomeration

...at Cheap Talk.

The choice of major

Marginal Revolution discusses how student's have changed what majors they choose, contributing to some of todays issues.

The Economics of Snow in South Hadley

The Economics of Snow in South Hadley

by Lina, Olivia, Yang, and Xinyang

This weekend, the students of MoHo have once again added another “wonderful and memorial” experience to their college slam book. This weekend’s snow storm was like no other. The beautiful MoHo campus was turned upside down. Trees fell on buildings, and made it very scary and unsafe to play outside. The aftermath of the storm left students really excited because we now had “36” hours in a day to finally catch up on classes that were becoming overwhelming.  The only thing that would have made it better would have been some hot chocolate and s’mores around a fireplace!

However, hot chocolate was out of the question. We came to realize our dependency on electricity because there are limited substitutes for energy. Consequently, as consumers of electricity, our demand is inelastic. The power outage brought all activities on the campus to a standstill. Lina and her friends decided to go to Big Y to buy some groceries. Although the shop was opened, they were accepting only cash. Electronic transactions could not be processed. They decided to come back to school to use the ATM in Blanchard, but guess what? The ATM also operates on ELECTRICITY! For an absurd second, they honestly thought the ATM ran on anything other than electricity. It was a reality check!

Previously we thought the cost of a snow storm was only the money spent on buying salt and equipment to clean up, but it actually involves a lot more. Dairy products in the dining halls and Big Y had to be thrown away because of the power shortage. This turned out to be a large waste of money because they spent money to purchase these products, but didn’t  receive any revenue let alone profits.

It was also very surprising that almost all MoHo students were craving for food from Main Moon, but guess what? Main Moon also went on a “break” during the storm. This would have been the perfect time for Main Moon and other stores to make more money since most students soon grew tired of the Blanchard sandwiches we were fed. With this new demand for groceries and food created by the storm, Big Y and Main Moon could have increased the prices of their commodities.  Students and other locals would have paid the higher prices because their demand would have been inelastic.

This got us thinking. If there were a power outage in all of America, it would be a major disaster because we are connected to the world through the help of electricity and Internet. Businesses would lose a lot of money because the storm would reduce their ability to preserve their products. Businesses also might lose money from necessary cleanup efforts.  They would also suffer losses from the halt in business as a result of not being able to process transactions and run daily operations. Therefore, it would be more profitable and efficient for companies to become self-reliant or find alternative sources of energy.  They might be able to avoid what happened in the little town of South Hadley on a much larger scale.