Oh, yeah? Well,
if you want recommendations, I
can give you a few. Do you have family
out there, or are you just checking it
out? No, we're going to seven different
national parks. Oh, that's it. So we're
going to kind of hit a lot of them. You
have to give me your reviews and tell me
if it's worth going. Okay, so today's
lecture, we're going to finish up talking about
consumer optimization. The homework's going
to be released tonight, but you have like
nine days to do it. I'm only releasing
it tonight just to finish with it, and I
know some people want to get to it early so
I wanted to give you that option but no
rush at all and the next exam's in a in
a few weeks so I'll tell you more about
that next week but yeah these two topics that
we've just done are going to feature
heavily on it for sure and finally I've been
kind of banging on about one example
when it comes to this idea of empirical
evidence the idea of coming to class and
doing well on the exam so I kind of wanted to
see like can I actually show you this so I
got our data from this class and on the left
hand side is the exam scores out of like
26.667 whatever it is and on the right hand
side the variable I have is attendance to class
so the first question I have is how the
hell do I have our attendance data given I
don't make you like signing or anything like that
Does anyone know? So this isn't a
full sample of every class, it's our Kahoot
data. We've done I think six Kahoot's
now, is it? So I know if people are
here on Kahoot days. And then what I want
to see, does attendance on the Kahoot
days predict exam outcome? And as you
can see here, this is between zero and six
attendance. A one class increase in attendance
predicts a 0.47 increase in the exam
score out of 26.67. So like a 2% increase
in the exam score. But as I've been
careful to say, this is a prediction,
not a causal effect. Does anyone remember
why this is not a causal effect but
only a prediction? Exactly. So something
like work ethic or motivation may be the key
driver of people coming to class. People with
more work ethic and more motivation are
probably going to study more and do better on
the exam in general. So my teaching quality
could be bad and that could not be a reason
why people do better on the exam because
they come to class. It's these other factors.
So how you interpret this 0.47 here is really
important depending on how you get the
data. Is it like a randomised experiment or
a natural experiment as we call it or is it
selective data like was just mentioned here
with people being more likely to do one thing
because of a certain trade or not oh yeah
so i kind of want to go over again two of the
main concepts we talked about on wednesday
these are really important you'll see a lot
of this on the homework and on the exam as
well so if you have questions about it now
is the time to ask so what i did was i created
um using the help of of claude an interactive
version of consumer optimization so let
me make this a little bit smaller i don't
know how much more I can make it so as you can
see here we have you can't really see here
let me see if I can turn off the light you
can see here the the highlighted blue line
is the indifference curve and the yellow line
is the the the budget line and you can see
the optimal amount is when the budget line
touches the indifference curve so it's tangential
this is when the market rate of substitution
the slope of the budget line is equal
to the marginal rate of substitution the
slope of the indifference curve so currently
the optimal utility is on this indifference
curve that gives 25 so any point of this
indifference curve gives 25 it gives you the market
rate of substitution here which is 2
divided by 3 which is 0 .667 and it gives you
how much of x and y being consumed and you
can change anything here so if you change the
preference right here this is going to
change the indifference curves this changes the
utility function so as you can see as we move
it to the left the indifference curves
become flatter and flatter and as we move it to
the right they become steeper and steeper
so this is going to affect how much wine
X will be consumed you don't need to worry about
that as much it's just cool to show I think
then we can show as income increases the
market rate of substitution remains the same
remember you're not changing the prices at
all you know shifting the income out when income
is higher and you're shifting the income
left when income decreases so this changes
the optimal utility in the amount of x and
y you choose in total but it doesn't change
the market rate of substitution and finally
you can see as we change the price of y as y
becomes more is this sorry as y becomes
more expensive so if we go here is why
it becomes more expensive the market
rate of substitution is changing. You can
purchase less of Y given what you have
before and you can see that the equilibrium
is changing as well as Y gets more
expensive. So now the market rate of
substitution is 0.276. Utility is 30.46
and you're consuming 71 of X3 of Y. Whereas
if Y gets cheaper you can see utility
is increasing because your real income is
increasing and the percentage between X and Y is
changing. Your market rate of substitution
is changing as well. So I'll send this out
for you to play around with but it's important
to see how these different effects can
change the consumer equilibrium i have
another one here as well which isn't as good it's
very messy i must say but this is looking
at the income and substitution effects when
the the the price of a of something changes
so we have our original price of x our price
of y income and preference rate as you
can see here it shows from our original this is
the original budget line this is where the
optimal point is at 25.25 then there's a
price change and we can see the new optimal
with the price change is here at 8.333 and this
compensate here is when you take the new
slope of the budget line and don't change
the slope but shift it up until it's tangential
to the original difference curve and gives
us point B. So remember this point B, as we
go from A to B, that tells us if we hold
real income constant, how does just the price
change affect people's behavior? How will
they substitute between X and Y? And B to C
gives us the income effect changes because
if something becomes more expensive, you
have less real income than before, and if
something becomes cheaper, you have more real
income than before any questions regarding
either of these really important concepts
okay so we finished up talking about the idea
of gift giving some of the unique aspects
of gift giving and what economists like to
say about gift giving is that the best thing
you can do is give a cash gift so if you
give a present let's say you give ten dollars
worth of X you're restricting what people
can do you're not giving them any freedom to
choose so this just shifts their current
indifference curve their utility directly
to the right by ten dollars so while this
improves their utility you get more utility from
b than a we know if you just gave them ten
dollars which shifts their budget line
up by whatever the equivalent of ten dollars
is when they were to maximize their behavior
here they would choose option c which is sum
of x and sum of why so this is why presents
can be inefficient so we looked at a couple
of videos and things about people returning
gifts etc and we talked about you know
during Christmas time when there's you know
billions of dollars spent on presents imagine
you run a store and if everyone in the
world was an economist and they all got gifts
that they you know didn't like they could
return it for cash and spend it somewhere else
if you were the owner of a store what
potential policies could you put in place to
reduce the amount of loss that you'd have from
people returning and going and taking their
money to other places? Put your managerial
hats on. Yeah? No return after
30 days policy. This is something
very common. No return after 30 days. In fact,
I was meant to return something to Amazon.
I got lazy and forgot, and I was not
able to return it, but I was kind of pissed
off with Amazon and starting shopping on
Walmart for a little bit after that. So
there are like costs to like pissing off your
consumers in that way. Brooke, did you
have your hand up? I was going to say you
can do like a return for store credit so you
don't lose any money. Store credit, that's
a really big one. And there's something
kind of equivalent to store credit, but it's
something that stores offer before a gift
even occurs. Does anyone kind of know what I'm
trying to get at with that? Yeah. A gift card.
Gift card, exactly. Gift cards used to
be really popular. I don't even know if they
are. Has anyone here bought gift cards for
people recently? Do people do that? Okay,
So it's kind of thing. So this is what
happens when you have store credit
or a gift card for store X. So you've
got store X, you've got every other
store, store Y. So what a gift
card will do is give a person more
money, but they can only spend
it at store X. So as you can see
here, on the initial budget line, they're
choosing A. And what $10 a store credit
will do is, let's say they're choosing
originally this point here, where they're
getting zero of X and all of Y, $10
of store credit will shift the budget line
horizontally by $10. They can still
purchase the same amount of Y, but
they can't get more than that because
the $10 store credit can only be used
at store X. That's why the highest
point of Y is here. Then you can see the
slope's the exact same. It's just been
shifted out by $10. And the idea here
is if you gave someone a direct
present from the store, if we go back to our
always sunny example if you bought them
a shirt that they didn't like they could
go from a to b but by allowing for store
credit or a gift card or something like
that they have freedom of choosing within
the store and as long as x and y are
normal goods this can result in the person
optimizing their utility at point c so a gift
card or store credit can result in you
know an efficient outcome if you don't
take into account the effort that goes into
you know returning and all that sort of
thing so this is why gift cards can be
good a lot of the time however this falls
apart when one of the goods in this case good
x is not a normal good it's an inferior good
so our definition of inferior good is
as income increases consumption and demand
for a good decreases so as you can see here the
budget lines are the exact same at ten
dollars store credit at store x pushes out
the the original point horizontally by ten
dollars slopes the same so you can see originally
they're consuming at a and then they'll
consume at point e and this is because as
your income increases you want to consume
less and less of x but you actually can't
consume any less than x here based on the
difference curve so if you'd given ten dollars cash
instead the budget line wouldn't have
this kinks version like this because you can
spend it all on why it has our original slope
like this so you can see with the cash
equivalent of the gift card or the store credit
here they can choose this point d here
which is higher than e so they can't choose
any area within here when there's a gift
card as a result this actually makes them worse
softer than they would be otherwise with
a gift card there's inefficiency because of
the nature of it being an inferior good so
i guess the the moral of the story is don't
give um gift cards to places that have
inferior goods if you can figure that one out
okay so finally when it comes to gift giving
like economists like it kind of weird when
when it comes to gift giving we talked about
this idea that cash is better but when
you break it down it's even weirder than that
and i wanted to have our resident weirdo
Sheldon Cooper explain you know gift given the
way a lot of economists would think about it
and then we'll push back on that and
actually talk about why gift-giving can be good
once we get through some ads I really
should sign him I've got YouTube premium for a
Do you ever think that your life as a parent
feels like a juggling act with Purdue local,
the juggling act? Yeah. Figures. Did you just let us in? Luckily for you, this is not a nuclear reactor. So, what'd you get
the birthday boy? Well, Raj got him
an awesome limited edition Dark Knight
sculpture based on Alex Ross's definitive
Batman, and I got him this amazing
autographed copy of the Feynman
Lectures on physics. Nice! I got him a sweater. Okay, well he might like that I've seen
him get chilly Sheldon, I didn't see
your present That's because I didn't bring
one Why not? Don't ask The entire
institution of gift giving makes no sense Too late
Let's say that I go out and I spend $50 on
you It's a laborious activity Because I have
to imagine what you need Whereas you know
what you need I could simplify things Just
give you the $50 directly And then you
could give me $50 on my birthday and so long
until one of us dies, leaving the other one
old and $50 richer. And I ask you,
is it worth it? Told you not to ask. Well, show him.
You're his friend. Friends give each
other presents. I accept your premise. I reject your conclusion. Try telling
him it's a non -optional social
convention. What? Just do it. It's a non-optional
social convention. Fair enough. So, I kind of don't
like the Big Bang Theory. I think the
forced laugh tracks, like, if you ever watch
one of these, like, laugh track shows
without the laugh tracks, it's, like, kind
of scary. So watch Friends, Seinfeld, or
Big Bang Theory without the laugh tracks,
and it's like, ooh. But there's a lot
of, I think, really interesting things going
on here. The first thing we said is this economic
logic of why you give money instead
of presents is people know like their own
preferences, the best way to maximise their
own utility with cash. Giving a gift like
constrains their options and they're worse
off. But I think Sheldon makes a really
good point here. Like imagine there's only
two people in the world, you and another
person and you're friends with each
other. And for each of your birthdays you
always give each other $50. So you're not
actually making any more or losing any more
until someone dies. So why give anything
in the first place? so we have a bunch of
reasons we've talked about the economic
logic of gift giving but there's a lot of reasons
why people give so signaling and sentiment
by giving a gift you signal a form of
friendship and it's not necessarily about the
dollar value of the gift the sentimental
value matters a lot as well so the clip we saw
both Raj and Leonard bought like no Howard
and Leonard sorry bought Howard and Raj
anyway two of the characters bought it now one
of the characters like really thoughtful
gifts one was some signed copy of the the return
to Feynman lectures and the other was
some dark night thing and a lot of parents
you know get gifts for their birthdays from
their four and five year olds which are
these crappy little mugs made at like you know
daycare and things like that that has zero
economic value but it has a lot of sentimental
value to the parents so gift giving is
not necessarily about getting the most
expensive gift it's about the signaling of the
thought another reason could be self-control
problems you might want to give someone a gift
but you're worried if you give them you
know 50 they'll go straight to poly market
and spend it all on that whereas if you get
them something you know they'll actually get
value out of it due to certain self-control
problems the big one is social norms um
one of my favorite thinkers uh christina
bicchiere has a book called the grammar of society
which is all about social norms and it
argues that norms are so powerful that it
kind of drive us drives us to do a whole bunch
of things so norms are essentially when
you think everyone else is going to act a
certain way and you think everyone else expects
you to act a certain way then you'll act in
that way even though you don't really
want to so norms are powerful so gift giving
is definitely a norm and the types of gift is
a norm as well so if you think about faux
pas behavior it's faux pas because it violates
social norms so if you're with a bunch
of friends or family opening gifts around
the holiday period and everyone's giving each
other gifts and someone opens one from you and
it's a 50 note it's gonna it's kind of
weird um people will look at you weirdly
think of you weirdly as well so following social
norms is something that we do and gift
giving is a social norm another interesting
one is informational advantage so you know
certain products that your friends don't and
if your friend knew about it maybe they'd
buy it but by you knowing about it you
can get them something that they wouldn't
know themselves and be better off so a
bunch of my friends recently have like been
buying each other robo vacs and stuff they
have a bunch of young kids and animals in
their house and they say to them prove
their life so much and they wouldn't have
got this on their own because they didn't
know about it, even though RoboVax are like
10 years old by now. Finally, mental
accounting. This is an idea in behavioral
economics. So in normal economics, we say money's
fungible. So it means $100 is $100 no matter
what. But this is not actually how people
think. People put different values on
money depending on how they got it. So here
it says the recipients may value gifts
differently than equivalent cash so an example i
give is imagine a husband and a wife sharing
the same bank account now the husband could
go out using the money from the bank
account and buy like a nintendo switch or
something like that but he's happier when his
wife goes out and buys the switch for him as
a gift it's the same money it's literally
the same money being spent but the idea of
the gift feels different from you going out and
spending it yourself for the same reason
a hundred dollars that drops out of the
sky into your pocket is going to feel different
to a hundred dollars that you've earned
there's a lot of studies showing people
will spend that money differently depending
on how they got the money so a hundred
dollars is not a hundred dollars when it comes
to actual behavior so a very similar case i
want to speak about to this idea of gift
giving is donations and charitable giving so
when you make a donation you can donate cash
directly to a person or you can donate
some in-kind gift like food or put something
towards shelter, etc. And a big thing that's
discussed a lot is when walking on the
street and you see a homeless person,
they're asking for cash. Many people reason or
give an excuse that they won't donate
to a homeless person because they'll spend
the money on alcohol and drugs. So this
is an argument people have for not giving
cash to those in need. So firstly, is this
true? Would they spend it on alcohol and
drugs? Mixed evidence on this. And the
more controversial point is, is this
necessarily a bad thing? Now, there are some
people more on the libertarian side
that would say, hey, like, they spend
money on whatever they want and that
makes them happier. That's great. It doesn't
matter what it is. However, I probably
fall more on the side that, you know,
certain behaviors actually make people
worse off and also have negative
externalities to it. But as we know, alcohol
and drugs have negative externalities
associated with it. So, in general though,
not just when giving to people on the
street, homeless people, or unhoused, sorry
I should say, that's the current
terminology, but when giving
charity in general to people in developing
countries, is it better to just give
direct cash, or should we be restricting
the choice set of recipients, which is
what being paternalistic is? Restricting
choices allowed. and there's pros and
cons to both so as i said before if recipients
would spend the money on a bad thing
that would make them worse off then it's
better to restrict their preferences also you
as a donor have your own preferences you know
exactly how the money will be spent on charity
when you restrict the gift so for
example if you follow one of the monotheistic
religions um you will have certain values
about what you think you should spend money
on so you wouldn't want to donate money to
someone if they spend it on sex, drugs, rock
and roll as the old saying would go. So
you'd rather restrict their, their, their
what they can receive and not let them have their full choice set. Finally there are some
goods that won't be funded if you just
give straight cash thus you can give to charities
that provide these goods. So public goods
has been an example of this. There's a lot of
charities in developing countries that focus
on health medicine interventions,
education interventions like building schools,
hiring teachers, et cetera. And as
we know from the incentives of public
goods, if you just gave everyone cash,
these wouldn't happen. So this is
another really good reason for more
paternalistic giving. However, there are also
cons to paternalistic giving. You don't
know what the preferences of the
recipients are, and you could be giving them money
that actually doesn't make them as best
off as they could be. In other words, So
similar to gift giving, this could result in a
lot of inefficiencies when it comes to
giving to charity. And a charity that
I think is really interesting is one
called Give Directly. Has anyone heard of
Give Directly before? It's kind of like,
it does what it says, is they take 99
.5% of your donation and just give it
directly to someone in need in a
developing country. And the way they give
is really interesting. They'll target certain
local communities and they'll give
the entire community the same cash
injection. So each individual will receive
a certain amount of money. The reason why
they do this is if you only give half the
village or half the community money and
the other half not, this could result in
really bad inequality effects, jealousy,
more, you know, crime, etc. So they just target a
village and they give them all money in a
really easy way. I'll link this so you can
watch the video on what they do. It's really
cool. and give directly argue that the best
thing to do is to give people just direct cash
rather than you know restrict the gift and
give an in-kind donation so the first argument
they give is more philosophical that
people in poverty deserve to choose how to best
improve their lives so this autonomy argument
so as you can see here here's some testimonies
of what people spent their money on so this
person invested in farming this one
invested in their in in their shop, my income has
risen to 400 per month because of these
investments in the shop. I use 70 dollars to
buy a sack of beans as a way to save
money profitably and purchase a sewing
machine. And this is the idea, we don't
know what people want or we don't
know what people need. So by restricting
what they can get, similar to the idea
of gift giving, if you give
someone a direct gift instead of
money, they're not as well off as
they could be. So this is the
first argument they make, which is
more philosophical, but there's evidence here like we talked
about before. So with gift giving,
we said there's like 30% inefficiency
because people aren't as well off as they could
be. There's all these social norms around
gift giving as well, which we need to take
into account. But with charitable
giving, they argue, and they've researched on
this, that cash aid is at least 25% more
efficient than in-kind aid like food, making
it a critical tool in a year of deep
humanitarian budget cuts. So if someone needs
to fix the roof of their shop, for example,
or they want to buy more, you know, stuff
to help, you know, with growth and
development for their business in the field.
And you give them a sack of beans as
an in-kind gift. That's not going to
make them better off. So this is the idea
of inefficiency. And as a result, they
argue that there's a lot less people
being helped for the same amount of
money as there would be if we just gave
cash donations. And the second cool
thing about this, and this is why I
focused on the idea that everyone in the
village or everyone in the community
receives the cash injection, is that
there are not just microeconomic effects
in making individuals better off. This
actually results in growth in the whole
economy in general. So there's a factor
of around 2 to 2.5 local economic growth
multipliers. So this doesn't mean
that your $1 is just helping one person.
It has a 2.5 times effect on the
entire community. It raises GDP, it
raises growth, so it positively impacts
other people as well. So I think there's
a lot of really cool reasons why we should
be giving cash. I obviously have also
mentioned reasons why you shouldn't give cash
and giving to global health and development
is very different to like giving
people in your local communities as well.
So I thought that was really interesting and
there's this really cool paper published
in Jibo, the Journal of Economic Behaviour
and Organisation, a really good
journal in 2018 called Paternalistic
Giving, Restricting Recipient
Choice. So, what they talk about here
is why do people donate, what are
their motivations, and which types
of donors are more likely to want to
restrict the outcomes of the gifts that
people receive. So, what they do here is
they study how different types of donors
decide to give, and they classify donors
into four categories. And this is a really
rich literature one that I work on, and
essentially people are motivated to give for
all sorts of reasons. So the first one
here is what we call pure altruists. A pure
altruist is a donor who simply cares
about the outcome of the recipient, charity
or public good. And by outcome, I mean how much money they have. So a pure altruist,
for example, could want a
charity or an individual to have
specifically $110. So that charity
currently has $100. They'll donate $10 to
it, so it hits $110. But then let's
say the government comes up with a
policy that says any charity that has
less than $110, we will give them a
subsidy so they get up to $110, then a
peer altruist will reduce their donation,
they won't donate at all, because if the
charity has $100, the government will
give the $10 instead. We call this perfect crowding out
of donations. So these are for
people who only care about the
monetary outcomes. On the other hand, we have our warm
glow givers. Our warm glow givers
don't care about outcomes at all.
They just care about the warm
fuzzies of doing good. So the idea is that
a warm glow giver receives utility or
happiness from the act of giving itself
and not the outcome. Giving is
purely egoistic. So this person
who gives $10, they don't care
whether the charity has $100, $110,
or even $120. They just like the idea that they're giving $10. So going back to the
same situation as before, if the
government put in this policy, any charity
that has less than $110 will, you know, up their income to $110,
this wouldn't change the warm-glue giver's
behaviour. They still give $10, even
if they reduce their giving by $10,
they'd have $10 more and the charity
would also have $110 because the government
would fund it. So we say there's no
crowding out here. Third, there's impure
altruists who are motivated by both this
idea of pure altruism and warm-glue. And
finally, we have we call them non
-strong givers strong non-givers, sorry
I should say people who just don't
donate to charity so in this experiment
they do a few cool things, first is like
how do we actually measure if someone's
one type of giver or the other and the
second is how do we determine if they're
paternalistic and want to restrict
others' donations or not so in terms of
categorisation in the first part of the experiment
they have this task which they call the warm
glue giving task, and this task is meant to
identify who has his motivations to give
purely for ego reasons. So subjects received
a $20 endowment and participants
were informed that the charity that
they selected would receive $20
donation from the experimenter. So
the charity has $20. The participant could
then choose to donate any amount of their
own $20 to the charity. So zero and anywhere
between zero and 20. They The amount
contributed by the experimenter to your
selected charity will be reduced by however
much you pass to your selected charity. Your
selected charity will receive neither more
nor less than $20. So if you decide
to donate $5, the experimenter will
donate $5 less. Essentially what
this means, it doesn't matter what
your choice is, the charity will
always get $20. So if you're a pure
altruist and you care about the outcome, you
shouldn't give anything. you'd rather have the
dollar than not have the dollar and this
doesn't benefit the charity at all in terms
of how much they get however if you're a
warm glow giver as we established there are
other reasons to give you just feel good by giving
50% to the charity regardless of how
efficient or effective it actually is so this
is how they measure people that have these
warm glow motivations and then they
have a surprise second task to
measure pure altruism in this second task
the subject may again donate from what
remains from their $20 endowment after task one
to the same recipient with any donation in
task two being added to the recipient's outcome.
So if you donated for example $5 in task
one that means you'd have $15 left for
task two and let's say you gave $9 in task
two that would mean 15 minus 9 you have $6
left and the charity the recipient would get
$20 from task one plus the $29 you give them
in task 2, 29 total. So you can actually
increase the amount of money that the
subject gets in task 2, which is
what motivates pure altruists. So this
is how in task 1 and task 2, they're
able to isolate and elicit the
motivations for giving. So in this table
here, this is their categorizations. This
is the warm glow task, if they gave zero or
more than zero in task 1. And this is the
altruism task, if they gave zero or more
than zero in task 2. as you can see in this
quadrant here these are people who gave
nothing in either task so these are our
strong non-givers so 27.8% of the population
in this experiment didn't give then we
can see our people that are purely
motivated by warm glow in this quadrant here they
gave more than zero in the warm glow
task when it didn't actually impact the
recipient and then they gave nothing in the
pure altruist task so 14.8% are purely
motivated by warm glow. A quarter of people
are purely motivated by the outcome of the
recipient. They gave nothing in the one
glow task and they gave more than zero in the
pure altruism task. And the most common
one, a third of people essentially gave
a little bit positive in both. So most
people tend to have motivations of both.
They like to give for the outcome but also
it feels good to give and that is a huge
determinant of giving. So finally what they
did was they were able to classify everyone
then they wanted to see if people want to give
these cash gifts or are they wanting to
restrict it and in economics we don't like
things to be costless because you can say
whatever you want but when people do things at
a cost of themselves this gives us insight
into their own preferences so this is the
important one here this column so what they did
was all participants got a ten dollar show
up fee and they told participants would you
be willing to give up five dollars of your
show up fee so pay five dollars to restrict
this gift so rather than the recipient
receiving cash they receive some food instead
from a few charities these are all homeless
people in in melbourne by the way this was a
charity that was done with and as you can
see for our warm glow types none of them paid
any money to restrict preferences so they
were very happy just to give cash gifts but
for those that had pure altruism or impure
altruism there was a lot more people around a
third to a half that were actually willing
to give up five dollars to restrict the gift
so these people have preferences of restricting
giving and why i find this really
interesting is in the literature we like refer
to these warm glow givers as non-efficient non
-effective givers and pure altruists care
about the efficiency and outcomes but as we
just discussed there's a lot of dead weight
loss in efficiency to restricting gifts so
if our pure altruists are acting in an
inefficient way, are they effective, are they
efficient, or are there other criteria to take
into account as well? I don't know the
answer to that. There can be more research
done on that if anyone's interested, but I
thought this was a really nice, I guess,
case study, because it has a lot of
similar properties to gift giving, but
something that a lot of people care about is
donations, and it's nice to analyse this
in a scientific way. Okay, finally, we can
look at labor-leisure choice. This is very
common in labor economics how people react
when they receive a higher wage or a lower
wage. Similar to before we have two goods or
two variables here, leisure and income and
we're constrained by the amount of hours
in a day or hours in a week and most you can
have 24 hours of leisure and if your income
is $10 per hour the most you can earn by
working is 10 by the hours in the day 24
240 that gives us our budget line and our
budget set as you can tell the worker equilibrium
right now is when the indifference curve
is tangential to the budget line and this
is eight hours of work a day 16 hours of
leisure we can construct the budget line and the
budget set for these labor leisure trade
-offs as follows so imagine this person
gets a fixed payment of forty dollars and five
dollars per hour of work we can construct
their total earnings e equals 40 plus the
amount they get for per hour five which is the
maximum amount they can work minus every
hour they choose for leisure instead so this
is our budget line here 160 minus 5l so here's
an example petunia is working a job that
pays 12 per hour but she gets a raise of
$8 to $20 per hour. After family responsibilities
and sleep, she has 80 hours per week
available for work or leisure. So her original
budget set is her earnings equals 12 per
hour multiplied the max she can work minus
leisure, which gives us this, and then it
increases to 20 here. So once again, there's
a lot going on here. This is the original
budget set. If she works all 80 hours at
12 per hour she can get 960 dollars this is
the slope of the budget line this is the
budget set but when she gets a raise it goes up
to here so like before we can break this
down into a substitute effect and an income
effect so to do this we take the slope of the
new budget constraint and we move it down
until it hits the old indifference curve
the old indifference curve and as we can
see here the substitute effect is going from
um is going from this point here to point c
so you're decreasing the amount of leisure
and increasing the amount of of of hours
work as a substitution effect but once we
move up to the the new line because of the
higher real income this person actually ends
up having more hours of leisure and less hours
of work than before but they make more
money because they have higher income now so
there's a lot of situations where this has been
started with like uber drivers in factories
etc that show that people do have this
trade-off between time worked where a lot of
people actually work less when they receive
higher wages because of this real income
difference the income effects and substitution
effects going opposite directions
which everyone dominates is what determines
whether they work more or less finally we can
derive an individual's demand curve from this
consumer equilibrium and then we can add
individuals to market equilibrium which we've
kind of already done before so as you can
see here when the price is equal to one of X
is equal to one then at equilibrium they're
consuming X1 so when the price is equal to
one they're consuming X1 and when holding
everything else constant the price of X changes
from one to zero it decreases we can
see at this equilibrium here sorry the price
increases from p1 to p0 this restricts the
the choice set you can see they're consuming
at a so at a this is at x0 we can map this down
here and this gives us our law of demand
when the price of x is higher they consume
less of x compared to when the price of x
is lower they consume more of x so you can
generate the individual demand curve from the
consumer equilibrium. Finally, we've
already kind of talked about this, we
created our demand curve in this way
when we played out our interactive game
a while ago, but if we have two
individuals A and B, and when the price
is $40, A demands $10, B demands
$20, that means if these are the
only two people in society, when
the price is $40, then the demand is
going to just be those two's demand at that
point added together. So 10 plus 20 equals
30. And then you can do it for just
two points and you can construct
your straight line. So yeah, at 60 they
both demand zero. So that's how you can
construct this line here. This is fairly
straightforward. We've kind of looked
at this already. Okay, any questions
on any of this before we jump
into the kahoot? Great. So whether it's
goods X or Y, whether it's gift
-giving, label-age or trade-off, The
same fundamental ideas are kind
of the same here. Substitution, income
effects, where people choose to
optimise, etc. All logged in?
Anyone still waiting? No worries. No rush. You all good up the back? Great. Okay,
let's get started. Hey, the first two are very wordy. I apologise. I'll read through them. Number seven. the budget set
represents all bundles of goods that maximize
utility the combination of all goods x and y
that are affordable for the consumer the
combination of x and y that exactly exhausts the
consumer's income the consumer's preferences
over different bundles of goods very
wordy i do apologize just guess if you don't
know okay most people got that correct the
budget set is not the budget line it's different
it's every option available to you in
terms of X and Y bundles that you can consume
so most people got that correct I I assume
a lot of people timed out there better to
guess than not guess the slope of the
budget line is determined by the
consumers income only consumers preferences
the ratio of the prices of two
goods PX divided by PY the marginal rate
of substitution. Most people got
that correct. The slope of
our budget line is the market rate
of substitution which is PX
divided by PY. This is kind of
attractive. The marginal rate of
substitution is the slope of the
indifference curve. Slope of the
indifference curve. Still tied up the top here. Okay,
third question. An increase in
the consumer's income will change
the slope of the budget line.
True or false? Okay, quick answers
in on this one. People feel confident. The last question
is also a little bit of a clue to
this one as well. Hey let's aim for 75
% correct on this one. Yeah fair enough. Okay
so no it doesn't change the slope of the
budget line. The market rate of substitution
which is the slope stays the same. There's no
difference between the price of X and price
of Y. The income just shifts the budget line
out or in depending on if income increases
or decreases okay okay is that glasses
nerdy eagle still in the lead okay fourth question
consumer equilibrium occurs when the
consumer spends all income on X the indifferent
curve intersects the budget line at two
points the consumer is on the lowest possible
indifference curve the marginal rate of
substitution equals the market rate of substitution
open bracket so i'll get back to this
at the end in the other class this is
the most common wrong answer as well i'll
tell you why this is wrong but when the
slope of the of the the budget line equals
the slope of the indifference curve
that's when you optimize whether when they kind
of just touch each other and this is
when the marginal rate of substitution
equals the market rate of substitution those
are the two slopes okay we have a new
leader i love it when the koala is in the lead
it makes me feel patriotic okay
penultimate question the substitution effect of a
price increase for good X refers to the change
in consumption due to the change in real
income relative price changes resulting
movement over on the same indifference curve the
shift from one budget line to another
the total change in consumption of good X
yeah this one's wordy and long as well I do
apologize for that most people got that right
though great so this is the first part of
our two effects when there's a price change
this is when you see what the new budget line
looks like the slope and bring it all the
way up to the original indifference curve
and that tells you how people trade off
between the two prices and the relative prices
so great i'm really happy that the majority
got that one right okay one question left
who is earmuff koala brooke have you won
one already before you haven't won one
yet okay 300 points up how confident you're
gonna hang on here 100% okay yeah nothing
can possible I go wrong okay last question
from the perspective of standard consumer
theory what is the best gift assume
all of the same value an in-kind gift
eg a fruitcake a gift card to a
specific store cash money all three
equally preferred. When we say
standard consumer theory, we mean our
weird economists. That's what we mean. It wasn't obvious. Okay, great. Most
people got it right. Brooke, how are you
feeling? Great. Okay. Congratulations,
Brooke. You can come up and then pick your
prize. Do you want your photos sake?
Is that what you're going to go for?
Of course. Amazing. All right. That's all I have
today. I've got like 10 minutes now if anyone
wants to ask me questions but the homework
should be available in an hour there'll be a
lot of these types of consumer equilibrium
questions on it as well as stuff in the
rationality lecture you've got plenty of time to
come see me next week in office hours if you
have questions have a good weekend let's
beat Indiana tonight so if you're not interested
that's fine but I'll see you for the
assignment because I'm an expert in the
giving stuff, you find it interesting at
all? Yeah, I thought it was very interesting.
Yeah, like a question like that
you say, like it's always, you always make
something worse off by giving kind donation
or something like that. I think there's
a lot you could work with there. I
can think about that. If you're not
interested, totally fine with it. Yeah, that
is pretty interesting. If you want, I can
try to be with you sometime next week.
Yeah, let's do that so I can set something,
because I don't want to, like, lead this
last minute for you. I want to give you
time on that as well. Okay, brilliant.
Congratulations. Thank you. Hi there, how's it going? So, how can I check
which questions I'm going to
ask? The exam? It's a bit hard to
check individually, but if you come
to my office out, I can go over
the exam with you and we can try to
figure out what you've got wrong.
Yeah, yeah. Definitely come
to my office out. No, it was already early. I had two earlier today. Yeah, yeah. If
you can't make any of them, email me,
we can set up an alternate time.
Yeah, no worries. Hey, you all good? How is this calculated? So what I did, did
you come class late or... No, I was...
Yeah, so I've got everyone's exam
scores, obviously, out of 26.67, as you
saw on Brightspace. And what I did
was, I downloaded all the CAHOOP
scores, and if someone had zero,
I calculated that they didn't attend
class that day, then more than zero they
attended class that day. So this is a
variable between zero and six, in terms of the
amount of Kahoot's they attended. Oh, Kahoot's
factored in for a third. Well, that's the
only way I can measure attendance, when you
think about it. Oh, yeah, factored. You
came in light, I saw. Today, yes. Yeah, yeah. So I can only, I don't
measure attendance every day, but I'm
like, hey, like, if someone scored zero in
a Kahoot, they weren't in class that day.
They scored more than zero, that means they
were in class, so I was able to use that
as kind of a proxy for attendance. And
now you could argue that Kahoot days might
have higher attendance if people know it's
going to be in Kahoot that day. But for a
lot of them, I feel like there was too
much uncertainty to know. So as you can see,
it's a pretty strong prediction about
attendance to outcome. I didn't know that
you're factoring attendance for the
victim. I thought it's like towards the
end of the course. Oh, no, no. Well,
firstly, this doesn't have any bearing on
your marks at all. This was just something
I was interested in. Got it. I think
he's like doing the economic prediction
of how like attendance this is the example
I gave yeah this predicts higher score
but this isn't causal because this could
just be people with high work ethic come
to class and people with high work ethic
do better on exams and this is the exact
example I gave I'm like oh this is a beautiful
life to show you all this yeah yeah I
mean yeah like like why give examples
when you can show the real data you And
what was the average? It was 80. It was like what, 24? Yeah, yeah, yeah. No,
it was pretty solid. What I liked was in
the distribution, the people that
got under 80, like I'd say only a few
people failed. A lot of people were in like
the 65 to 75 zone, which is good because
you don't want like so many people doing badly
with an average of 80 distribution. What
was the median? the median was I think I
no no I think that I think the meeting was
lower was it lower yeah yeah yeah oh I thought
there were just a few people know the
average was 80 but the median would be lower
yeah the number yes so if if if people did
really badly and the average was 80 that would
mean the median would be higher higher yeah
because it's just a couple people yeah so
i think i think the meeting was like 79 or
something like that so it was pretty so so up
the top only six people out of 200 got perfect
scores so there was a few questions so
so you know the question the bicycle helmets
question only 25 percent of people got
that right so i had a couple of questions in
there that i just like differentiated the top
end and then as you saw there was a lot
of high floor style questions if you just
came to class and did the ratings like you should
do okay yeah um yeah but yeah i thought
was uh are the other exams going to be like
similar difficult or harder it's a good
question um we'll see do you have to cover
accordingly like is that like an end gpa you're
targeting but is it just yeah so there's a
distribution I need to target with the the
mean of the the GPS 3.0 but I think that's
like 83 84 percent yeah