Politics

by Yue and Anna

One Saturday afternoon in Amherst: One group of people assembled shouting, “We are the 99%” while the other group holding the boards as shown in the picture.  Two groups were standing beside each other protesting for the exactly opposite petitions.

These are America’s founding fathers – Washington, Jefferson, Adams and Franklin; Not these guys – Marx, Lenin, Stalin or Mao

Indeed, how many people in the United States truly care about politics?  In my opinion, more people prefer to discuss rather than participate. Like myself, the majority of people stay indifferent about trivial changes between “capitalism” and “egalitarianism” in society. In fact, most people don’t notice if the percentage of total societal wealth goes to the top 1% (richest) has increased since last month or not. 

However, in general, the majority of people prefer things to be average and moderate. Admittedly, there are ones who prefer more egalitarianism if they are suffering from nonsufficient health care or housing provision while others who work for Wall Street may believe that they deserve what they earn and societal wealth should be distributed based on individual’s productivity.  When things go beyond certain limit and when one group feels that they are now worse off and they can no longer bear this change, people will try to express their discontent hoping to change things back to what they expected. Does it remind you about the second assumption of Indifference Curve which decides the convexity of IC curves -- “Average is always better than extreme”?

But what happens when two parties are trying to win more votes? Suppose that it is a duopoly game with two parties – Democrats and Republicans competing for votes.

            

According to the “median voter theorem”, suppose people vote for the candidate who commits a policy position closest to his or her preference and there are only two parties competing, in order to get more votes, either Democrats or Republicans will tend to advocate their policy the closest to the one preferred by the median voters. Therefore, the Nash Equilibrium is where two parties both end up with receiving half of the votes. At this point, voters are indifferent between voting for either party.

             

Based on this theory, both Democrats and Republicans will tend to claim their policy proposal to be in the middle of the axis between Egalitarianism and Capitalism.  Although we do find that for example, presidential candidates tend to convey their policy in a moderate way during pre-electoral debates and speeches so that they can win votes from different groups, things are far more complicated in reality.  First, it is usually not a duopoly game given that there are often more than two parties competing and even though some small parties do not have a high likelihood to win, their positions may have an impact on other parties’ wining of votes. Secondly, it is nearly impossible to find the exact “median position” of the public toward certain issues. In this case, the median position for social distribution of wealth may not be the exact average of “egalitarianism” and “pure capitalism”.  It is reasonable to believe that more people now prefer a more equal distribution of income given the current economic condition and from the fact that so many people participated in the “Occupy Wall-street” protest. Furthermore, people’s preferences change by exogenous shocks and may even be manipulated by certain “propagandas.”  

    

What shape does the backward-bending labor supply curve have in practice?

What shape does the backward-bending labor supply curve have in practice?

by Anna and Yue

In microeconomic theory, the Slutsky equation tells us that when someone’s wage rate increases, due to the substitution effect she starts to work more in order to substitute consumption for leisure. But when the wage rate increases the value of the endowment goes up as well so the person may take extra leisure to consume this extra income. Which is the larger effect is an empirical matter and depends on the individual’s initial conditions and preferences. However, the theory states that in general the labor supply curve bends backward meaning that at some point the income effect will outgrow the substitution effect: We conducted a survey to find out whether this theoretical assumption holds. 

The survey included the following questions:

1. Imagine you work at MHC 10 hours per week and you are paid $8 an hour. Your wage increases to $12 an hour. Will you work more or less, and how many hours in total will you work assuming you are taking the standard load of 16 credits?
2. Now imagine your hourly wage increases to $20. How many hours will you work per week?
3. Your wage increases to $30. How many hours will you work per week?
4. Your wage increases to $50. How many hours will you work per week?
5. By how much must your hourly wage increase to make you work less and spend more time on studying and leisure?

22 students from Microeconomic theory class answered the survey questions. Below are the average results.

1. If wage rate rises from $8 to $12 an hour, students will work 11.5 hours per week on the average.
2. If the wage rate goes up to $20 an hour, students will work 12.48 hours per week on the average.
3. If the wage rate increases to $30 an hour, students will work 12.18 hours per week on the average.
4. If the wage rate rises to $50 an hour, students will work 12.68 hours per week on the average.
5. The answers vary from $8 to $1,000.

The survey results indicate that the labor supply curve for the 22 respondents will look like this:

In order to understand what happens to our labor supply curve and what gives it this shape, we divided the respondents into 5 categories based on their responses.

• For two people, an increase in the current $8/h wage rate will motivate them to work less.
• For six people any increase in the wage rate will not change the amount of time they already work (assumingly 10 hours per week).
• Six people will always work more as their wage rate increases from $8 to $50.
• Three people will work more at first, and as the wage rate rises even more, they will work less. These are the people who demonstrate the backward-bending labor supply curve.
• Five people will work less at first, but as their wage rate increases, they will work more.

What do these results tell us? The most important conclusion is that the wage rate at which the income effect will outgrow the substitution effect is different for each person, and only for 3 people in our sample this “break-even wage rate” is captured by the $8-$50 hourly wage range. 

The budget set of the college student: Time

The budget set of the college student: Time

By Zehra, Adaora, and Anna

As we are all approaching another semester with new classes, many realize how easy our first year was. My first year, I was caught up in every TV show, only had to write 1-page papers, and could join more clubs than I definitely could now. As I look at the classes I take next semester, and the classes I have taken in the past, I realize that I have a very important budget restraint: time, or, to be more exact, 24  hours in a day. With our budget set of time, we have two options: study, and leisure. Leisure includes socializing, reading for fun, TV, going out, sleeping, or anything that is not actively learning material or going over material.

each day is obviously different, if there are 24 hours, each individual has a maximum of 24 hours of studying, if leisure was 0, or the opposite, 24 hours of leisure and 0 hours of studying. Some days do seem like the two extremes, but on an average, it seems to work out to an increasing amount of studying with each year.

1^st year: time spent studying, but more time (it felt like!) in
leisurely activities

4^th year: not all studying, but closer to more time spent studying on the same restraint

At the same time of all of this, I also feel like as we become older, our ability to focus

and manage time also increases. We may spend more time studying, but as we have more on our plate, we are also able to figure out the best ways to study, the best places to study, how to focus quicker. As a result, with greater time management skills, I often feel like our budget restraint has increased. While there are still the same amount of hours in the day, it seems as though we spend more time studying, but more time calculating times to socialize, spend time at paid work. While our time did budget restrain did not technically increase: we still have the same amount of time, 24 hours in a day. But, as more   is put on our academic workload it appears to feel as if budget restraint is increasing with our ability to utilize time better, to the point of avoiding “nothing” time.

Rational economic decision – Peter Pan Bus or Megabus?

Rational economic decision – Peter Pan Bus or Megabus?

by Munazza, Maureen, and Yixue

As Thanksgiving break approached, students of Mount Holyoke began to excitedly make travel plans to go home or visit friends and relatives over the five-day break. Restrained by the tight budget of a typical college student, flying over short distances about the East Coast is not the ideal option, and hence students usually prefer to travel by road, and therefore generally look at two options while booking tickets: the Peter Pan Bus and the Megabus.

Even a year ago, Peter Pan was the only option available to the students of the Mount Holyoke and five college community for travelling from the Pioneer Valley to cities such as New York, Hartford and Washington DC. It could very well be said that the Peter Pan Bus Company had a monopoly in the transportation market for Mount Holyoke students. The high prices charged did not deter students from purchasing tickets, as it was the sole provider of transportation services, with no competing companies serving the area.

However, in 2010, a new company entered the market – Megabus Company, servicing from Amherst to Hartford and New York, where further connections to other destinations can be conveniently made from those locations. What’s more? Tickets usually cost less than $10, sometimes even as less as $1 if booked in advance! This is great news for students of Mount Holyoke, whose trips to home and weekend trips to Hartford or New York just got so much easier.

However, Megabus ticket prices to New York, which rise with respect to demand over a certain period of time, had gone up to $29 over Thanksgiving break, whereas Peter Pan remained at its standard $20 one-way. The transportation market is oligopolistic, with only a few firms operate in the market (in this case, a duopoly with only two companies – Peter Pan and Megabus). These two firms have dominant control over the market demand by Mount Holyoke students. In an oligopolistic market structure, the pricing strategy of firms is interdependent – that is, the decisions of one company influence the measures taken my other firms to maximize their own profit. Looking at the high price of Megabus tickets over Thanksgiving break, Peter Pan could choose to increase its ticket price since demand is relatively inelastic at that time. This would be an effective profit-maximization strategy for the company; however, it could decide to deliberately keep it lower than the Megabus rates to attract more customers.

For Mount Holyoke students, the question remains – Peter Pan or Megabus? Well, there are several economic and general factors to be considered before making the decision and booking the tickets. First of all, taking the Megabus means travelling all the way to Hampshire Mall, whereas the Peter Pan can be boarded right from our doorstep. Moreover, the Megabus offers services to only New York and Hartford, and separate connections to other destinations must be made there. Peter Pan, on the other hand, offers direct services, usually with a short transit in Springfield, Massachusetts. Brand loyalty plays an important part as well – students who have always travelled by Peter Pan before the entry of Megabus into the market would not readily want to switch over to a new company. Peter Pan has a stop conveniently located in South Hadley, right across the street from the main gate of Mount Holyoke, making it easy for students travelling home to hop on board without much hassle. Students would take all these factors into account before making a rational decisional about which service to choose. While some may prioritize cost and usually prefer Megabus as it is a cheaper option, others may stick to Peter Pan due to brand loyalty and convenience. However, over Thanksgiving break in particular, when prices of Peter Pan tickets to New York were lower than Megabus tickets, it would have been a wiser and more rational economic decision to choose Peter Pan over Megabus.

It must, however, be kept in mind that if tickets are booked last-minute, Megabus tickets would have risen even more, and even Peter Pan increases price for last-minute tickets as those are relatively inelastic. Therefore, it is always a smarter option for Mount Holyoke girls to book their tickets in advance!

The Umbrella Hypothesis

The Umbrella Hypothesis

by Mindan, Yanni, Jiayi and Syeda

The concept of revealed preferences provides economists with an idea of consumer demand. However, the theory can be applied only so far as consumer preferences and behavior remain unchanged. So how often do consumer’s preferences change and how well can we record these changes in order for revealed preferences to be effectively applied to predict consumer behavior? Our “Umbrella Theory” may help explicate the answers.

Let us assume that stealing of a good, U (or temporarily borrowing of the good without informing the owner with intentions to return it eventually), is the same action as consumption of the good U; in which case both stealing/borrowing and consumption reveal preferences. Let that good U be an umbrella. For the sake of simple microeconomic analysis, let there be a second good, P, and you can assume it is an iPhone. Now, imagine it is a bright sunny day with a cheerful weather forecast. Imagine further that you did not check the forecast in a hurry in the morning and carried out with you a stylish clear plastic umbrella. If you were to leave it or forget it anywhere on campus, you need not fear that it will be taken by anyone because no one will have a use for an umbrella in dry weather. Everyone will prefer P to U. However, this being New England, suppose it starts raining suddenly in the afternoon and you are one of the lucky few in possession of an umbrella. In such a scenario, would you feel safe leaving your umbrella lying around just about anywhere? We guess you would not. We think this is a great example of how suddenly and swiftly consumers’ preferences change and thus the application of our model needs to change as well.

You might be wondering why P is an iPhone and thinking to yourself that even if it is raining and someone is in need of an umbrella, that someone might still prefer P to U because P is worth more in monetary terms than U in all circumstances. Here, we would like to share a personal experience of one of our teammates. She lost her umbrella twice on campus. She returned to not find it in the library entrance lobby once and the other time it disappeared from Blanchard. However, she lost her iPhone three times on campus, once at a public fair, and each time she was called to be informed where she could pick up her phone. This leads us to believe that maybe the utility which leads to preferences for an object is derived more from how useful that object is at the given circumstance and not how valuable it is. However, as Professor Schmeiser pointed out, it might be the case that iPhones are returned because they are expensive and people who could take it would feel guiltier because of it, whereas an umbrella is not so expensive and the “guilt content” is significantly lesser and can be justified by a pressing need for an umbrella in that circumstance.

Whatever the counter-arguments might be, this umbrella-iPhone market is surely an interesting ground for the study of consumer preferences. If we reasonably assume that both are normal goods which have a CED=0 because they are unrelated, it is interesting to observe that despite the monetary value of the iPhone being higher than that of an umbrella, it is not “preferred” over an umbrella (through stealing or borrowing), under all circumstances; whereas even though the umbrella is cheaper it may be preferred more than an iPhone if it is raining and the consumer does not possess an umbrella; or even when it is not raining and a thief-by-nature steals the umbrella instead of the iPhone due to a lower guilt-content. In all circumstances here, the axiom of revealed preferences seems to hold!

Black Friday

Marginal Revolution discusses the economics of Black Friday here.

Imperfect Information

Imperfect Information

by Munazza, Maureen, and Yixue

In her computer science course at Mount Holyoke, Ashley was instructed to program a game. She designed a simple dice game similar to “Pig” with two players. Two dice were pictured on the screen, and the first player rolled the dice until he/she rolled a one, at which point all of the accumulated points would disappear, and the second player would begin rolling. The only way to hold points past turns was to click a hold button at the bottom of the screen, at which point it would become the other player’s turn. The first player to accumulate 100 points would win.

One night, while playing this game in the Pearsons common room, Ashley and her friend Cam began discussing rationality. “After all,” Cam argued, “there must be an optimal way to play this game so that I have the best chance of winning possible.”

“True,” Ashley countered, “but it’s so tempting to roll just one more time, and then again, and again… for example, I’ve rolled more than five times without rolling a one and have 41 points.” Intrigued by the conversation, Cam began observing other friends who played the game, and made some interesting discoveries about rationality and information.

If an individual is rational, then they should make decisions that maximize their personal utility based on all available information, and when discussing consumer choices in class, we generally assume perfect information, which leads to perfectly rational decisions. However, in reality, no one has access to perfect information, and this affects choices and behavior. When playing Pig, each player should choose the strategy that is most efficient in order to gain his/her desired outcome by rationally considering all options and then playing accordingly, without being tempted by the lure of trying their luck on a less optimal but “flashier” strategy. 

After watching many friends play this game Cam realized there were several factors that, on the surface, made some player decisions seem irrational. This was because different players had different goals. Some players were most interested in winning against their opponent, while others were most interested in gaining the highest number of points personally, irrespective of what their opponent gained. The third category of players were most interested in gaining the highest score on each roll, irrespective of their final scores and their opponent’s final score.

These three categories of players made very different decisions. Those who wanted to win against their opponent almost always pressed hold after one or two rolls, capturing small amounts of points on almost every turn. The second category rolled three or four times before pressing hold and sometimes ended up with more points than the first group, but not necessarily winning against their opponent. The third category rolled as many times as they could, often losing points after rolling a one, but occasionally gaining really large amounts of points per turn, which was celebrated as a victory in and of itself. Therefore, each player was making a rational decision depending on his/her personal goals while playing the game.

Cam’s second observation was based on information. Assuming that each player did not have perfect information about the specific mathematical probabilities of the game or about their opponent’s playing strategies, she noticed that some players modified their strategies as they gained more information by observing their opponent. Therefore, as information increased, each player adjusted his/her strategy accordingly.