Your assignment is to use a principle, or principles, discussed in the course to explain some pattern of events or behavior that you personally have observed.
Examples are available on this handout, in the textbook, and many more are available in the syllabus-listed book “The Economic Naturalist” by Robert Frank.
Your space limit is 500 words. Many excellent papers are significantly shorter. Please do not lard your essay with complex terminology. Imagine yourself talking to a relative who has never had a course in economics. The best papers are ones that would be clearly intelligible to such a person, and typically these papers do not use any algebra or graphs. You need not include a bibliography.
This assignment is not a PhD dissertation. You are not expected to do voluminous research in support of your argument, although a relevant fact or two might help convince yourself and others that you are on the right track. It makes no difference whether your topic is “important,” but try, as best you can, to choose something interesting. A really successful paper is one that begins with a really interesting question (one that makes the listener instantly curious to learn the answer) and then uses an economic principle or principles to construct a plausible answer.
I expect that most of you will come up with an original question to use for this assignment. You may only use one of the questions presented in the textbook or online if you provide a unique perspective on that question, and not just reiterate what has already been written.
Your explanation should be plausible and should draw from an economic argument. Your submission should be submitted online. I will not accept physical hand-ins for this assignment.
EXAMPLE 1:
Why is milk sold in rectangular containers, while soft drinks are sold in round ones? (adapted from Robert Frank)
Virtually all soft drink containers, whether aluminum or glass, are cylindrical. Milk containers are almost always rectangular in cross-section. Rectangular containers use shelf space more economically than cylindrical ones. So why do soft drink producers stick with cylindrical containers?
One possibility is that because soft drinks are often consumed directly from the container, the extra cost of storing cylindrical containers is justified because they fit more comfortably in the hand. This is less of an issue in the case of milk, which is typically not consumed directly from the container.
But even if most people drank milk straight from the carton, the cost-benefit principle suggests that it would be unlikely to be sold in cylindrical containers. Although rectangular containers economize on shelf space, irrespective of their contents, the shelf space they save is more valuable in the case of milk than in the case of soft drinks. Most soft drinks sold in supermarkets are stored on open shelves, which are cheap to buy and have no operating costs. Milk is exclusively stored in refrigerated cabinets, which are both expensive to purchase and costly to operate. Shelf space inside these cabinets thus comes at a premium, and hence the added benefit of packaging milk in rectangular containers.
EXAMPLE 2:
Why do budget airlines charge for onboard meals (which are typically free on luxury airlines) while luxury hotels charge for Internet access (which is typically free at budget hotels)? (Adapted from Jia Dai)
Free in-flight meals, once the norm on almost all airlines, are now regularly offered only on premium-price carriers. Travelers who fly United or American are now expected to either bring their own food onboard or purchase boxed meals in flight. In contrast, luxury hotels like the Four Seasons typically charge $10 or more a day for in-room Internet access, while budget hotels routinely offer the same service free of charge. Why this difference?
In a perfectly competitive market, customers who opt for additional services can expect to pay extra for them. If a company tried to offer an additional service for “free” by including it in the price of the basic product, a rival seller could lure away customers who didn’t want that service by setting a lower price for the basic product and charging separately for the service.
The market for seats on budget airlines is closer to being perfectly competitive than the market for seats on luxury airlines. The latter are fewer in number and offer more specialized services. For similar reasons, the market for rooms in budget hotels is closer to being perfectly competitive than the market for rooms in luxury hotels. These observations seem to suggest that additional services would be more likely to be priced separately in both budget hotels and budget airlines. This explains why budget airlines charge for meals while luxury airlines include them in the base price. It can also explain why most airlines might have offered meals for free in the past, since the entire air travel market was a luxury market until relatively recently. But then why do we observe the opposite result for Internet access in hotels?
A plausible reason for the reversal is that the cost structure of the two goods is different. Each meal costs the airline extra, but the cost of providing Internet access is largely fixed. Once a hotel has installed a wireless Internet network, the marginal cost of allowing another guest to log on is literally zero.
The more competitive a market for a good or a service is, the closer its price will be to marginal cost. The market for budget hotel rooms is more competitive than the market for luxury hotel rooms, so Internet access is more likely to be provided for free at budget hotels. Budget hotels might like to charge extra for Internet access, but since the marginal cost of providing access is zero, some budget hotel would advertise free Internet access, drawing away price-sensitive travelers. Budget airlines are not under similar pressure to offer free meal services because the marginal cost of each meal served is positive.
Luxury hotels may charge for Internet access because their clientele tends to be not highly sensitive to price. Still, the fact that the marginal cost of providing Internet access is zero suggests that, if guests complain, some luxury hotels may start including access in their room rates. If that happens, other luxury hotels will be under pressure to follow suit.