How Come Prices For Turkeys Fall Just Before Thanksgiving?

In a few days it will be Thanksgiving, that great holiday where people consume huge quantities of turkey, stuffing, cranberry sauce, and pie for dessert.  One of the strange things about this holiday is that a few days before everyone starts cooking, turkeys go on sale!  In my family, we  almost never eat turkey except at Thanksgiving.  Why does the price come down at the one time in the year when demand for the product spikes? Continue reading

Why Do People Pay $25 for Cards Against Humanity?

The number one bestselling toy/games on Amazon today is a card game called “Cards Against Humanity.”  Almost 14,000 Amazon shoppers have written a review of the game.  Not only does this game hold the number one slot but the expansion pack, which contains an additional 100 cards is ranked number two in this Amazon category.  Card games and toys with massive followings are nothing new in the world (Pokemon cards, baseball cards, etc.), but Cards Against Humanity is special because if you go to the game’s website one of the first things that you see are two buttons.  The left button states “Buy now for $25” while the right button states “Download for free.” Why do people pay $25 when the company makes it simple to avoid paying them even one penny? Continue reading

Why Isn’t the Price I Pay For Gas Falling Very Much?

If crude oil prices have dropped almost 25% per barrel since June, why haven’t gas prices at the pump decreased a similar amount?  At the end of June a barrel of crude oil on the NYMEX exchange was selling for over $103.  This morning (Oct. 16th) the price was below $80 a barrel.  At the end of June the average gas station in the USA was selling a gallon of regular unleaded gasoline for $3.70.  The government shows today that the average price is $3.21, a drop of only 13%.  Why has the price at the pump fallen by roughly half as much as crude oil prices? Continue reading

How Can We Stop (or at Least Slow Down) Ebola and other Potential Pandemics from Spreading?

Front page stories in many newspapers today reported the death of Thomas E. Duncan, the USA’s first Ebola virus victim.  Mr. Duncan lived in Liberia and had recently come to Texas to rekindle an old love interest.  Unfortunately for Mr. Duncan, he became infected with Ebola a few days before getting on the plane to fly to the USA.  The episode triggered panic in Texas and hysteria among fellow passengers on his United Airlines flights.  It also showed the USA health care system is not ready to deal with Ebola since the first time Mr. Duncan went to the hospital he was sent home, even after telling staff he was from Liberia, the center of the epidemic.  How can we stop, or at least slow down, infectious viruses from spreading around the world?

The answer is to change airline policies when a potential pandemic arises.  Continue reading

Did Derek Jeter Really Retire?

Yesterday at Fenway Park the famous New York Yankee baseball player Derek Jeter played his last game (see video here).  Jeter announced his “retirement” last February during Yankee pre-season training.  He felt after playing professional baseball for 20 years that it “was the right time” to leave.  Media around the world focused on how sad people felt about his “retirement” at age 40.  While watching his final at bat the thought occurred to me that while Derek Jeter might be leaving the active roster of the NY Yankees, there is little chance that he is actually retiring.  Why isn’t Derek Jeter really retiring? Continue reading

Why Would Olive Garden Offer People the Chance to Eat Unlimited Pasta for 7 Weeks?

This past Monday Olive Garden, a chain of 800+ locations that that serves Italian food began offering passes that gave 1,000 people the chance to eat as much pasta as they wanted for seven weeks.  The passes cost only $100 and entitled the holder to any kind of pasta dish.   Plus, the pass holder and everyone who ate with the pass holder got unlimited soda.  A few days before the promotion I gave a lecture that emphasized well- run companies focused on making a profit.  One of my students asked “Why would any business do something this crazy, since Olive Garden was going to make a loss, not a profit, on every pass sold?” Continue reading

Will the Napa Earthquake Really Result in Wineries Losing Millions of Dollars of Sales?

Two weeks ago a 6.0 earthquake hit Napa Valley, the California region famous for making red wine.  On Saturday morning the Wall Street Journal published an article stating “About 120 wineries in Napa Valley suffered an estimated $50 million in damage from the magnitude 6.0 earthquake.”  This $50 million figure is wrong. Continue reading

Is Kobe Beef Really Worth The Price?

There are a number of ultra-premium mass market products for sale in the world.  These products cost a lot of money but many people have a chance to buy or try them.   Designer handbags and pocketbooks, vintage French wines, and limited edition sports cars are all examples.  The economic idea of all these products is the same.  First, a relatively limited supply is available each year.  Second, a large amount of marketing is done continuously to ensure both exceptionally high product recognition and that consumers’ associate the product as a luxury item. Continue reading

TV on United Airlines

United Airlines is rolling out TVs on the back of every Boeing 737 airplane seat.  Soon 200 of its airplanes will be equipped.  I got on one of the upgraded airlines on Friday and another on Sunday and  was reminded of my recent post about the ubiquity of televisions.    However, a funny thing happened on both flights.  Almost no one watched TV!

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Why Are Television Sets Showing Up Everywhere?

I was filling my car up with gas the other day at a Mobil station when it struck me that television sets are everywhere!  The thought occurred to me because I found myself watching TV while pumping gas.  The gas pump had a TV built into it and was showing a combination of news, ads and short entertainment features on a special network just for gas station pumps.  At the next aisle over was a taxi cab.  Between the driver and the backseat was a small TV, so that passengers could be entertained and shown ads while the cab was stuck in traffic.  This got me thinking; it is not just gas stations and taxis.  I often watch television while sitting on planes.  Not long ago I even found myself watching in a rest room.  I was at a sports bar and the bar had individual tv’s at each urinal so that patrons didn’t have to miss a moment of action, just because they needed to use the bathroom.

The key question is “why have television sets become so ubiquitous?”  Continue reading

Can Eating A Burger Help Save Animals?

Last night I ate at “Ted’s Montana Grill” located in the Arena district of Columbus.  Ted’s is a small chain that has the very interesting tagline “Eat Great.  Do Good.”  The idea behind the restaurant is simple.  To save buffalo and bison in the USA from extinction people need to eat them.  By eating this relatively exotic food you are doing good for the world.  I did my part by eating two bison burgers (medium rare) for dinner.  The big question is can eating a burger (or two) help save the buffalo and bison?

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Why Are So Many Mentally Ill People in Prison?

Today the New York Times ran an editorial that states “The New York City jail system must be redesigned to serve the growing number of inmates with mental illnesses.”  While the article points out what should be done, it doesn’t explain why there has been such growth in mentally ill inmates.

One key reason is that over the past few decades city, county and state governments in the U.S. have closed most of their psychiatric hospitals.  The graph below shows the number of psychiatric beds per 100,000 people in the USA over time.

Is it Really Just the Poor Who Eat Fast Food?

I just finished and posted to the working paper directory of this website research that asks “Is it really just the poor who eat fast food?”   This question is important because some cities are banning or thinking of banning fast food restaurants in the belief this will improve poor people’s health.  For example, Los Angeles in 2008 banned all new fast food restaurants from opening in the low income neighborhoods of South L.A.

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Do Investors Really Care About Data Breaches?

On Dec. 19th Target, the giant retailer, released a statement saying that their customers’ data had been breached.  The Wall Street Journal recently ran a front page story on the how the CEO was handling the breach.  The Wall Street Journal article states that Target clearly suffered since the article contains statements like “During the holiday-shopping season, Target’s sales and store traffic plummeted.”

Target’s stock closed on Dec. 18th at $63.07 a share.  The stock closed on Dec. 19th, after the announcement, at $61.68 per share.  The loss of $1.39 per share translated into a drop of almost $1 billion in the value of the company.  Investors appeared to take the data breach seriously.

Today, Target released their quarterly report that covered the holiday shopping season.  This report quantified exactly how much sales fell (3.8% during the quarter) and even contains a quote from the CEO stating that sales before the data breach were much higher than expected and after the data breach sales were much lower.

The verdict by traders was to push the stock up almost 7% as I write this post.  Target stock is now at $60.31, and Wall Street by its actions suggests the data breach doesn’t matter.  Since Dec. 19th Target is down 2.2%. For a comparison, Walmart’s stock is down 3.4% over the same time frame.

Why is all this important?  The rise in Target’s stock price today suggests there are little or no long-term financial consequences for a large company having a massive data breach.  It looks to me like Wall Street doesn’t care about the security of our data but if we want continued economic growth, we as a society should care.  If people can’t trust using their credit cards, they will buy less.

What is the optimal way to ensure companies treat data more carefully?  Should there be fines for every customer record lost, similar to EPA (Environmental Protection Agency) rules that fine companies based on the amount of oil spilled?  Should there be criminal penalties for companies that are lax in protecting their customers’ identities?  Do you have other suggestions?

How Much Are Students Willing to Pay for an “A” in a Course?

How much money would a student pay to get an “A” in an introductory college course?  I ran an experiment in my introductory undergraduate class yesterday that showed the average student was willing to pay $525.

I frequently give lectures on Supply and Demand, which is a key foundation of economics.  Demand curves, which show how much is bought at every price, are often an abstract concept for many students.  To make the demand curves less abstract I explain to students that running a simple English auction, where the price starts low and goes higher over time, produces a demand curve for any good or service.  I then proceed to run an auction to actually create a demand curve.  During the auction I plot every bid using Excel and a demand curve grows on the screen round by round.

I tell the students up front that all proceeds from the auction benefit a local homeless shelter, provide them with the homeless shelter’s website and show them the donation acknowledgment letter a few classes later.

Yesterday, I auctioned off one “free homework” pass.  The pass enabled the purchaser to skip a single homework assignment and automatically get an “A” on that assignment.  Each homework is a 5 question online quiz.  The online quiz can take at most 15 minutes, but the typical student does the quiz in 4 minutes.  There are about 30 homework assignments in the course and homework counts for 10% of a student’s final grade.

The auction was very exciting this year.  When the economy is in poor shape few students are willing to pay much.  However, when the economy improves students tend to bid quite high.  The winning bid this year was $150, which is quite an increase from the $40 high bid during the depths of the recent recession.

The winning bid is not useful for calculating how much students are willing to pay for an “A” since many of the winners have been quite up-front about why they bid so much money.  They have stated they bid high because the money was going to charity.  However, after talking to many students, almost all the low bidders are not thinking about helping out homeless people, but instead are interested in getting a “free” A.

One hundred and ninety students participated in yesterday’s auction.  The price where half (95 students) were willing to buy the homework pass was about $1.75.  The homework pass comprised 0.333% of their total grade.  If they were willing to pay $1.75 for 0.333% of their grade then it is possible to calculate the price they would pay for 100% of their grade.  The calculation for 100% is $1.75/0.333% = $525.

It is also possible from the auction to calculate the value students put on their time.  On average students take 4 minutes to do the quiz.  My guess is that it takes about 1 minute to log on, navigate to the quiz, read the instructions and check the final score, so buying the homework pass saves the average student about 5 minutes of time.  Since they were willing to pay $1.75 to gain 5 minutes this means they are valuing their time around $21 per hour.  The $21 is a slight over-estimate since students are guaranteed an A with the pass, and are not guaranteed an A when doing the quiz.

I left the lecture wondering,  “Was $525 a lot of money or was it a little for a mark on a student’s transcript that a few years from now no one would ever care about?”

Can you price yourself out of a job?

We were in New York City recently and my wife wanted to treat the family to something memorable so we went to a Broadway play.  We saw “Matilda,” which is a musical based on a children’s story by Roald Dahl.  The story is about a small girl who goes to a school run by an evil woman.  The girl discovers she has magic powers and uses the powers to set everything right.  While the plot did not hold my attention, the set design and scenery did.  The set was amazing.

Beyond the wonderful design was how items came in and out.  I was expecting a small team of crew members to be shuttling desks and other furniture onto the stage like most plays.  Instead, the entire set appeared to be mechanized.  Desks and chairs rose up from the floor.  Blackboards swung down from the ceiling.  Humans were eliminated from the process of scene changes.

As I sat there marveling at the automation I wondered why the producers so carefully eliminated the crew from the show.  It turns out Broadway crew members are part of a very powerful union called local 1 of the IATSE (International Alliance of Theatrical Stage Employees).  The Wall Street Journal had an interesting article that suggests the union has negotiated very well and that top crew members earn $300,000 to $400,000 per year.

Given these costs some simple calculations show it makes financial sense to eliminate the crew.  Let’s say it takes five people to shift scenery in the play at $250,000 per year and that it costs $1 million to automate the process so that these people are not needed.  If the producers think that the play will run for more than one year then it makes financial sense to eliminate the stage crew and create an automated set.  In the first year the producers can save a 1/4 million dollars by automating.  The union, by asking for very high wages, can indeed price their own people out of a job.

If Matilda goes on the road to other cities beside New York, my guess is that the scenery and set will be much less automated.  I predict this because road shows tend to stay in cities for much shorter times than plays run on Broadway.  Moreover, Forbes magazine points out that IATSE members outside of local 1 in New York City earn far less.

Have you encountered other situations where people have priced themselves out of work?