Question

It's so hard to put a price on happiness, isn't it? But if you've ever had to choose between a job you like and a better-paying one that you like less, you probably wished some economist would tell you how much job satisfaction is worth. Trust in management is by far the biggest component to consider. Say you get a new boss and your trust in management goes up a bit (say, up 1 point on a 10-point scale). That's like getting a 36 -percent pay raise. In other words, that increased level of trust will boost your level of overall satisfaction in life by about the same amount as a 36 -percent raise would. a. Measure trust in management on a 10 -point scale, measure pay on the same 10 -point scale, and think of them as two goods. Sketch an indifference curve (with trust on the $x$ -axis) that is consistent with the ncws clip. b. What is the marginal rate of substitution between trust in management and pay according to this news clip? c. What does the news clip imply about the principle of diminishing marginal rate of substitution? Is that implication likely to be correct?

Short answer

1. Draw a downward-sloping indifference curve. 2. MRS is 3.6. 3. The clip assumes constant MRS.

Step-by-step solution

Understand the relationship

The news clip suggests that a 1-point increase in trust in management (on a 10-point scale) is equivalent to a 36% pay raise. This implies that on a 1-to-10 scale, they are treated as equally valuable by an individual.

Draw the Indifference Curve

With trust on the x-axis and pay on the y-axis, draw a downward-sloping indifference curve. This curve should reflect that as trust increases by 1 unit, the equivalent pay decrease that keeps satisfaction constant is about 3.6 points on the scale.

Calculate the Marginal Rate of Substitution (MRS)

The MRS is the rate at which a person is willing to trade off pay for trust while remaining equally satisfied. Since a 1-point increase in trust equals a 3.6-point decrease in pay, we can say the MRS is 3.6. $$\text{MRS}=3.6$$

Discuss Diminishing MRS

The principle of diminishing MRS implies that as a person gets more of one good, they are willing to give up less of another good to get more of the first one. The news clip doesn't specify whether this principle holds, but since it equates fixed increments of trust and pay, it doesn't directly address diminishing MRS. Thus, it assumes a constant rate of substitution, which might not fully reflect real-world preferences where diminishing MRS is typically observed.

Key concepts

Marginal Rate of Substitution

Imagine you're choosing between two goods that affect your happiness: trust in management and pay. The Marginal Rate of Substitution (MRS) tells us how much of one you’re willing to give up to get more of the other, while staying equally happy.
The example tells us that if trust in management increases by 1 point on a 10-point scale, it's like getting a 36% pay raise. In this case, the MRS measures how willing you'd be to trade trust for pay (or vice versa).
Here, the MRS equals 3.6. This means if you want to increase trust by 1 point, you could afford to reduce your pay by 3.6 points, keeping the same level of satisfaction. Think of it like trading; you'd trade 3.6 units of pay for 1 unit of trust.
This tells us a lot about someone's preferences. They're saying 1 point in trust is as valuable as a hefty pay raise. It’s like saying “I really value trusting my boss!”

Trust in Management

Trust in management is super important for job satisfaction. If you don't trust your boss, it can make the job stressful and unpleasant. We can measure this trust on a scale from 1 to 10, where 1 is no trust and 10 is complete trust.
In the example, even a small increase in trust (by 1 point) has a big impact, equivalent to a 36% raise in pay. This shows that trust isn't just a nice-to-have, it's crucial for feeling good about your job.
Think of trust like a strong foundation. When you trust your manager, you feel more secure, supported, and happy at work. You’re more likely to be satisfied and stay longer with the company. So, building trust isn’t just important for happiness, it’s critical for long-term career satisfaction.

Job Satisfaction

Job satisfaction involves several factors, and trust in management is a big one. But it's not just about trust; it's about how all these factors work together. Pay is obviously important too, but trust can sometimes be even more critical.
From the news clip, we see that increasing trust can make a person as happy as getting a significant raise. This shows that job satisfaction isn't just about money. It’s about feeling valued, secure, and respected at work.
If you’re deciding between two jobs, consider the whole picture. Higher pay is great, but a job where you trust your employer can often lead to higher overall satisfaction. It’s a balance, and what makes you happy in your job can vary person to person.

Principle of Diminishing Marginal Rate of Substitution

The Principle of Diminishing Marginal Rate of Substitution (MRS) says that as you get more of one good, you’re willing to give up less of another to get even more of the first one. Essentially, the more you already have of something, the less valuable an additional unit of it becomes.
In our example, a fixed MRS of 3.6 is assumed, suggesting a constant trade-off rate. This doesn't quite align with the principle of diminishing MRS since it implies you'll always trade trust and pay at the same rate.
Realistically, as trust increases, you might be less willing to give up more pay to get additional trust. The first few points of trust might be worth a lot, but after a while, gaining one more point might not be as valuable, reflecting diminishing MRS.
This principle is important in understanding real-world preferences and trade-offs, showing that the first few units of a good are often the most valuable.