What have I been doing for the last nine months?
In a sentence, microeconomic theory first creates an ideal world where interaction between individually optimizing agents creates socially efficient outcomes and then it systematically dismantles this ideal world to reveal structures that are important for understanding the outcomes in the real world.
Wish me luck in my prelim exam tomorrow!
Amtrak vs. Driving
"I hate driving," I'm fond of saying, but what does that mean? What does it mean to "hate" something? Are there a list of things you hate and then a list of things that you love and within each list there is no distinguishing between the hated and the loved? I mean I love my Mom and I love Peanut Butter. Its obvious that there's degrees of love, and hate.
But how to measure these degrees? There's no Fahrenheit or Celsius scale to help us. "I +10 hate driving," isn't a commonly heard phrase.
So "hate" is a relative term. To understand how much I hate driving, you'd have to understand how I hate driving relative to other things I hate. Do I hate it more than standing in line? Do I hate it more than being stung by a bee?
How much do I hate driving? Let's find out.
One way to measure "hate" would be to find out how much money I'd pay to avoid driving. You could ask me and I'd answer, but you're not getting a true sense of how much I'd pay, just the amount I'd pay, in theory
. Instead, to understand my hate of driving, we'd have to see how I actually put my money where my hate is.
I find myself having to take a quick trip North
this week. I could take Amtrak trains and buses or I could drive. Without thinking, I booked a round trip ticket on Amtrak for $106.
So, I hate driving by $106, right? Not really, because driving would have cost some money, too. Gas isn't cheap
. Given, my truck gets 20 miles per gallon and its 270 miles, at about $3.20 per gallon, my trip would have cost me about $86. So, I hate driving by at least $20 or about $4 an hour. By the way, I said "at least" because I might be willing to pay Amtrak more than what I paid (but don't tell Amtrak!).
Also, I'm neglecting some other benefits of using Amtrak rather than driving. In theory, because I won't be occupied with driving the truck, I'll be able to study for my final exams coming up on Wednesday. This obviously is a benefit that would undermine my measure of hate. I'm paying for Amtrak to reduce my total hate (if that means anything) by driving for me AND I'm buying from them a couple hours of study time that I wouldn't have had. I have no clue how to measure an hour of studying, though. In any case, because of these extra benefits, my lower bound on my estimate of hate is somewhere below $4.
So, do you hate driving? If so, by how much?
Below are options you can decide to take. You can take one and only option.
- Work an extra 10 minutes every day for the rest of your life in exchange for, upon your death, a guaranteed payment of $300,000 to your family (divided among them as you choose)
- Work an extra 10 minutes every day for the rest of your life in exchange for, upon your death, a guaranteed payment of 1/10 penny to each American plus a payment of $150,000 to your family (again, divided among them as you choose)
- Don't work the extra 10 minutes every day
Which do you choose if only the first and third options are available? What if only the second two options were available?
The second option is the estate tax
. If you switched from working the extra hour to not working when the 'death tax' was imposed, then you can start to see the economist's argument against the estate tax (or any wealth-based tax for that matter).
Now try this one. Given your current estate plan, you will have $3,300,000 in the bank when you die. Pick one:
- Give a little less than 1/2 penny to each American and $1,800,000 to your family
- Give each American 1/2 penny and give $1,650,000 to your family
- Work 10 minutes less than you currently do per day and have $3,000,000 in the bank when you die, giving a little less than 1/2 penny to each American and $1,500,000 to your family
Which do you choose if only the first and third options are available? What if only the second two options were available? Did your answers change?