Monday, July 16, 2007

Broken Chairs

I hope my micro students can answer the following:

Suppose a deli owner values a $20 chair at $100 and plans to buy a $20 pair of boots which he values at $50. Now suppose a child breaks the chair and the owner must replace it. Calculate society’s economic profit of the incident, indicating if it was better for society or not that the child broke the chair.

6 comments:

Anonymous said...

How do the boots figure into it? And since the deli owner is part of society, is the $20 he has to spend replacing the chair a factor in terms of society's profit?

David said...

boots are part of the opportunity cost.

(100-80) - (100+(50-20)) = -50

Carl Marks said...

Bad question. Deli owner does not know how much he values the chair or the boots. We cannot say the values them at these levels because he has not acted to buy them at these prices. If he did make a transaction we could only say that he anticipated the value of the chair at more than $20 at the time of purchase

Jenny said...

Why does the owner have to replace it? Is the child his?

David said...

Sure, the child's his. It's just a question. :)

And a good question, I might add. Of course he values it at a certain dollar amount. If he would pay $20 for the chair but he won't pay $10,000 for it, then clearly there's a point where his stops/starts being willing to pay for it. Granted, he might not know it at any precise time and it would take careful thinking on his part to know where it is (just like it takes careful thinking on my part to remember where I parked my car), but there has to be a number.

But more importantly, it is a numerical demonstration that explains why breaking things doesn't make us richer.

Carl Marks said...

there may in fact be a number, but thinking hard about it won't reveal it. Preferences are only revealed, even to oneself, at the moment of action. Because he is not accepting of denying any offers other than $20, we cannot determine his value of the item other than it is more than $20.

It may be a decent question as long as it is later explained that these values are in fact fictitious.