Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, December 13, 2005

Smorgasbords, Marginal Utility, Information, and Expectations

From Wikipedia:
Smorgasbord is an anglification of the Swedish word Smörgåsbord. It is a buffet style table in a restaurant, or a holiday feast at home, prepared with many small dishes. For a fixed amount of money, you are allowed to eat as many of these as you wish.
Phil Miller has a link to an interesting variation on Smorgasbords — all you can drink for a fixed price:
About 200 undergraduates from the London School of Economics rampaged after an end-of-year fancy dress party, where they paid a flat £5 entry fee to drink as much as they liked for free between 11 am and 2 pm.
First blush economic analysis predicts that people will consume food, beer, whatever is offered at such an affair, up to the point at which the marginal utility is zero. And this analysis is correct so far as it goes. That's what most of us teach our intro students in economics when introduction the concept of marginal utility.

But there are some additional, important considerations that rational maximizers will tend to make:
  • The more I consume of one beverage or type of food, the less utility I will get from a different beverage or food (assuming that marginal utility drops off dramatically as stomach capacity is approached). As a result,
  • It might be better to view the problem as a constrained optimization with stomach capacity, drunken stupidness, or alcohol poisoning as the constraint. Is it the constraint that causes the reduction in utility?
  • The previous two points are short-run. But in most instances, the pleasure from eating is contemporaneous with the eating, but the pain of over-eating comes later. Similarly, the pleasure of drinking in these situations comes with the drunkenness, while the agony of the after-effects comes later. Depending on the consumer's rate of time-preference, and depending on one's expectations and information, the point at which one reaches an expected utility maximum varies from person to person.
With these considerations in mind, one can make some empirical predictions and observations.
  1. Assume younger people have a higher rate of time preference, and/or
  2. Assume some younger people have less experience and less information, thereby forming incorrect expectations about the expected utility from these activities.
  3. That helps explain why we don't see drinking and eating binges in senior citizen communities.
In other words, we older folks quit earlier, in part, because when we look at the expected net present value of future utility, we have better information. Hence we know when to quit without the ensuing negative utility that results from over-indulging.

Well, most of the time we do....
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