Tag Archives: diminishing marginal utility

12.23.2012 | The Return of the McRib

The McRib is back.

People wonder though, why McDonald’s doesn’t just leave it on the menu. The reason might be how we perceive that extra bite.

Have you ever seen one of those newspaper devices where you put your money in and the top opens to reveal 10 or so NY Times? People, though, take only one and snap the lid shut. Logically, we take no more than a single paper because the second one has little usefulness. Or, as an economist would say, the marginal utility diminished. The second newspaper had much less usefulness than the first one.

For the McRib, one McDonald’s franchisee explains that when the McRib first returns, he sells close to 200 a day. However, by the end of the promotion, anticipation plummets and his daily McRib sales drop to fewer than 50. In other words, similar to that second copy of the NY Times, McRibs buyers are displaying diminishing marginal utility. After their first sandwich, they rarely return for more. Then though, if McDonald’s delays the McRib’s return, excitement again builds as consumers look forward to their first bite. This year, they said the McRib would return during October and then the date was postponed to December 17.

Sources and Resources: As Freakonomics economist Stephen Dubner explains it, McDonald’s just has to wait long enough for him to forget how bad it is. Here, a great analysis of McDonald’s strategy says it is all about arbitrage that is based on hog prices. Also, you might enjoy ths Businessinsider slide show of “11 Amazing McRib Facts” and this NPR interview of the McRib’s inventor. For example, the McRib sandwich contains 70 ingredients.

Posted by: adminEcon
Tags: arbitrage, demand curves, diminishing marginal utility, downward sloping demand, Freakonomics, McDonald's. McRib sandwich, NY Times dispensers, pork prices, Roger Mandigo
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09.13.2011 | Too Safe?

Assume for a moment that you have to decide whether to install body scanners at every airport in the U.S. Knowing a decision to proceed will make everyone safer, you say, “Yes.”

But, what if you first were told that there was a 1 in 3.5 million chance that an act of terrorism will kill you or someone you know? However, installing the scanners will make everyone safer by reducing that probability. Your decision?

Here, here, and here, a thought-provoking 3-part series in Slate discusses why we need more cost/benefit analysis when we decide how much to spend on homeland security.

Perhaps this Daily Beast article displays how some municipalities are inadvertently engaging in their own cost/benefit risk assessment.

The Economic Lesson

When you are very hungry, the first chocolate chip cookie you eat is delicious. After that, though, each additional cookie provides less and less extra pleasure. Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

Similarly, initially implementing a security infrastructure at airports would have provided a considerable increase in safety. The question, though, is where diminishing marginal utility sets in.

An Economic Question: Slate tells us that homeland security is a $690 billion federal budget item. Citing opportunity cost, what is the additional expense?

Posted by: adminEcon
Tags: diminishing marginal utility, federal budget, homeland security, opportunity cost
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08.29.2011 | “Tweetquakes”

Sometimes Tweets travel faster than seismic waves. And then, what happens?

In this wonderful webcomic from April 2010, an earthquake strikes, people Tweet, and within seconds, the news beats the temblor’s spread. Do people run for safety? No. They send new Tweets!

For the August 23, 2011 East Coast quake, 2 Harvard bloggers proved that truth does copy a cartoon. Calling it a tweetquake, they demonstrated that the 40,000+ Tweets that were sent within 1 minute of the quake radiated outward faster than the quake itself. You can see the Tweet spread here.

And here is how people were Tweeting about Hurricane Irene.

The Economic Lesson

Described in “Thinking Like an Economist,” (Lecture 6) from the Teaching Company, the economics of ignorance involves deciding how much information is optimal. Only when the benefit of an extra piece of information outweighs the cost of being ignorant should we be willing to add to our store of knowledge. While initially new data can be valuable, eventually, diminishing marginal utility starts to kick in and that extra piece of information is no longer worth our time or thought.

Even for a Tweet, then, we are always thinking at the margin, choosing a little more or less.

An Economic Question: When researching a topic, when does diminishing marginal utility set in?

Posted by: adminEcon
Tags: "tweetquakes", diminishing marginal utility, information, marginal benefit, marginal cost, Tweets, Twitter
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07.14.2010 | “LeBronomics”

Called “LeBronomics” by NPR’s Planet Money, LeBron James’ decision to go to Miami was about much more than $99 million. Instead, the key issue was “utils”.

Whenever economists want to quantify satisfaction, they use the “util”. If LeBron had selected Chicago, local residents might have felt 10 extra utils every time they watched their team play. (I just chose 10. The number does not matter.) Choosing New York, though, would have resulted in many more utils. 2009-2010 was a 50-loss, disappointing season for Knicks fans. Consequently, just seeing LeBron at every game would have generated lots of extra happiness for many New Yorkers.

By contrast, according to the Planet Money people, selecting Miami created the least extra happiness in the United States. Because Miami already has other superstars, adding a third would not create very many more utils. We could compare this to the utils we get from the first bite of a chocolate chip cookie and the 15th bite. We get much more pleasure at the beginning before adding lots more.

The Economic Lesson

Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

We might add that LeBron James did not experience diminishing marginal utility when he added to his income because Florida tax rates are among the lowest in the country.

Posted by: adminEcon
Tags: diminishing marginal utility, LeBron James, utils
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06.08.2010 | Money and Happiness

Does money buy happiness? A 2006 report from the Pew Research Center said yes and no.

If we compare income groups, the answer is yes. Almost 50% of people earning more than $100,000 annually said they were happy. However, as income levels dropped, so too did happiness. Only 24% of those who earned $30,000 a year said they were happy.

Pew researchers, though, have been asking the same question for three decades during which per capita income has risen. As a nation, we are richer and yet happiness levels have remained constant. They did discover, though, that when we discover we are earning more than others, we do experience a pop in happiness.

In another study Richard Easterlin investigated whether we experienced increasingly more or less happiness each time our income grew. If, he hypotheisized, our behavior paralleled typical economic behavior (diminishing marginal utility), we would display less extra happiness with increases in income. Instead, he found no marginal utility. There was no increase in happiness.

I do suspect though that the recession has affected happiness for many of us.

Your interpretation?

The Economic Lesson

When eating chocolate chip cookies, our total utility (satisfaction) usually increases. However, economists like to point out that the increase-the marginal utility- for each additional cookie is less and less. Numerically, we could say the first cookie gives us 10 units of utillity as does the second one. Then though, a third cookie might provide 3 units of pleasure and the fourth one only one unit of pleasure. Adding them all together, our pleasure is ascending. However, as we eat more and more, pleasure rises more slowly. Economists call this phenomenom diminishing marginal utility.

Posted by: adminEcon
Tags: diminishing marginal utility, happiness, income, income distribution, inequality
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