Microeconomics Question from Walter E. Williams:Edit
What economic forces explain each of the following phenomena? Give a logically complete discussion in each case.
- (1) The tendency for married couples with small children to spend relatively more on entertainment when they go out than do married couples without small children. (Note: this does not mean that couples with small children go out more often!).
- (2) The tendency for non-poor persons to transfer income or goods-in-kind to poor persons. (Avoid making interpersonal utility comparisons.) State the assumptions that underlay the choice to make money income transfers versus goods-in-kind transfers and which is more efficient?
- (3) The lessened tendency for physical attributes such as race and sex to be used as criteria for choice for higher level positions of employment (managers, executives, etc.) than for lower level positions of employment (janitors, dishwashers, etc.). Does the same reasoning explain why nepotism is virtually absent in professional sports?
- (4) The virtual absence of manual labor operating elevators, picking cotton, picking tomatoes and theater ushers in the United States.
- 1) The requirement of nannies and such to take care of the children while married couples are away means that for them there are fixed costs of going out that must be paid in addition to all the costs that unmarried couples pay. Thus the price of ratio of cheap dates to more expensive dates necessarily increases for married couples (or conversely, the ratio of expensive to cheap dates decreases), meaning that cheap dates become more expensive in terms of expensive date (or that expensive dates become cheaper in terms of cheap dates). This is necessarily the case because adding a fixed amount to any two numbers necessarily increases the smaller by a larger percentage than the larger number, bringing their ratio closer to one. So from the perspective of opportunity costs, expensive dates are less expensive for married couples than for non-married couples.
- 2) The non-poor give to the poor either because the welfare of the poor enters directly into the non-poor’s utility function or the act of giving to the poor enters into the utility function of the non-poor. The latter might be the case if it is not the welfare of the poor per se with which the non-poor are concerned, but rather the feeling of being “virtuous” that accompanies giving or the higher regard in which the giver is held by others that increases the giver’s utility.
- If the utility of the poor is an argument in the non-poor’s utility function, in-kind transfers are either inefficient or the poor are not economically rational. They are inefficient in the case where the poor are economically rational because if the poor would have preferred more of something else to the in-kind transfer, they could have been given a sum of money equal to the worth of the transfer and been better off for the same cost. It is possible that the poor would actually have used all of the additional income to purchase an amount of the good that would have been transferred equal to what would have been given, of course, but in general if a course of action is in some possible worlds less efficient and in all other worlds just as efficient as another course of action, we say that it is inefficient when compared to the latter course of action. Of course, if the poor are not rational and would use an equal amount of money to buy other things, even though the quantity given in-kind would increase their utility by a greater amount, then the in-kind transfer from the non-poor to the poor is efficient, given that the utility of the poor is an argument in the non-poor’s utility function.
- If, however, the utility function of the non-poor is for esteem or the feeling of virtue that accompanies giving, rather than the utility of the poor recipient, then as long as the giver's “consumption” of the transfer, be it in cash or in-kind, is the giver’s optimal bundle given the giver’s budget, then the transfer is efficient with respect to the question of whether or not the giver could increases his or her utility for the same cost, although for the same reasons as above, if one is concerned with how to increase the utility of the poor as efficiently as possible, the in-kind transfer is still inefficient.
- 3) People in higher-level positions are paid more because people in those positions have greater influence over the operations of the company and thus their marginal product is greater. In economic theory, people who discriminate treat discrimination like any other good, consuming it until they are indifferent between more discrimination and more of the profit that they give up from more discrimination. The higher the level of the position, the more the person in that position affects the profit of the company, and hence the greater the cost to discrimination in that position. Hence, since discrimination against people in higher level position is more costly, candidates for those positions are less likely to experience discrimination.
- In professional sports, the cost of discrimination is clearly very high because the athletes are analogous to executives in that each athlete on the team affects the revenue of team to a very large extent (more so, for instance, than the janitor who cleans the teams locker). Thus professional athletes are less likely to be discriminated against for the same reasons that high level executives aren’t.
- 4) Quite possibly, the absence of theater ushers, cotton pickers, etc. in the U.S. is due to minimum wage legislation. All of these positions contribute a very small marginal product and are usually performed by very unskilled labor. As such, in other countries, they earn very low wages, ones that are commensurate with their marginal product. However, in a country with minimum wage laws like the U.S., the market clearing wage cannot be paid because it is below the minimum legislated wage.
- Of course, another explanation for the absence of many low-wage positions in the U.S. is that is a capital-abundant country and thus labor is more relatively expensive than elsewhere. Advanced machinery, for instance, may be able to pick the same amount of cotton for a lower cost than a manual laborer.
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