Chapter 10

(Related to the Apply the Concept on page 346) Baseball writer Rob Neyer described attending a Red Sox game at Fenway Park in Boston and having a seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Briefly evaluate Neyer's reasoning.

(Related to the Apply the Concept on page 346) In 2012 , the San Francisco Giants Major League Baseball team signed pitcher Matt Cain to a contract that paid him a salary of $\mathrm{\$}20$ million per year from 2013 through 2017 . The annual salaries were all guaranteed, and the Giants had to pay Cain whether he performed well or not $-$ and they had to pay him even if the team released him and he no longer played for the Giants. During $2016,$ Cain pitched ineffectively, and at the beginning of the 2017 season, it was uncertain whether the Giants would keep him as a regular player. Giants General Manager Bobby Evans was quoted as saying that in the decision on Cain, his salary wasn't a factor: "It's really not about the money at this point." Is Evans's analysis correct? Should the salary the Giants are paying Cain matter in deciding whether to keep him on the team? Would the team's decision be affected if Cain were receiving the Major League Baseball minimum salary of $\mathrm{\$}535,000?$ Briefly explain.

In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller found that in both Hunan and Gansu, "Giffen behavior is most likely to be found among a range of households that are poor (but not too poor or too rich)." a. What do Jensen and Miller mean by "Giffen behavior"? b. Why would the poorest of the poor be less likely than people with slightly higher incomes to exhibit this behavior? c. Why must a good make up a very large portion of consumers' budgets to be a Giffen good?

According to the U.S. Energy Information Administration, the average price of heating oil fell to under $\mathrm{\$}3.00$ a gallon during the winter of $2014-2015,$ the lowest price in more than four years. About 6.2 million U.S. households in the Northeast rely on the fuel to heat their homes. For the following questions, assume that no factor that affects the demand for heating oil, other than its price, changed during the winter of $2014-2015$. a. If households in the Northeast increased their consumption of heating oil in the winter of $2014-2015,$ can we conclude that for these households, heating oil was a normal good? Briefly explain. b. If households in the Northeast decreased their consumption of heating oil in the winter of $2014-2015,$ can we conclude that for these households heating oil is an inferior good? Briefly explain. c. If households in the Northeast decreased their consumption of heating oil in the winter of $2014-2015$, can we conclude that for these households heating oil is a Giffen good? Briefly explain.

Maya spends her $\mathrm{\$}50$ budget on two goods, cans of tuna and bottles of ginger ale. Initially, the marginal utility per dollar she spends on tuna is equal to the marginal utility per dollar she spends on ginger ale. Then the price of ginger ale decreases, while her income and the price of tuna do not change. Determine whether each of the following statements about what happens as a result of the decrease in the price of ginger ale is true or false and briefly explain why. a. Her marginal utility from consuming ginger ale increases. b. The marginal utility per dollar she spends on ginger ale increases. c. Because of the substitution effect, Maya will buy more ginger ale. Therefore, we can conclude that ginger ale is a normal good. d. As Maya adjusts to the change in the price of ginger ale, her marginal utility per dollar spent on tuna will increase.

(Related to the Apply the Concept on page 346 ) The following excerpt is from a letter sent to a financial advice columnist: "My wife and I are trying to decide how to invest a $\mathrm{\$}250,000$ windfall. She wants to pay off our $\mathrm{\$}114,000$ mortgage, but I'm not eager to do that because we refinanced only nine months ago, paying $\mathrm{\$}3,000$ in fees and costs." Briefly discuss what effect the $\mathrm{\$}3,000$ refinancing cost should have on this couple's investment decision.

Andrea grew up enjoying her Italian grandmother's homecooked meals. Chicken and pasta with meatballs were her favorite foods. But after Andrea graduated from college, found a job, and got married, she became a vegetarian and no longer ate chicken or meatballs. Briefly explain which of the following statements provides the most likely explanation of Andrea's decision to become a vegetarian: $\bullet$ When Andrea was young, she was unrealistic about her future behavior. Therefore, she did not act rationally. $\bullet$ Andrea was not working when she was young. After she graduated from college and became employed, her income rose. We can conclude that for Andrea, chicken, meatballs, and other meat products are inferior goods. $\bullet$ Social influences explain Andrea's decision to become a vegetarian. More people, including celebrities from the entertainment field, have become vegetarians. Andrea became a vegetarian because she now feels a kinship with these celebrities, and being a vegetarian makes her appear to be fashionable.

In an article in the Quarterly Journal of Economics, Ted O'Donoghue and Matthew Rabin made the following observation: "People have self-control problems caused by a tendency to pursue immediate gratification in a way that their 'long-run selves' do not appreciate." What do they mean by people's "long-run selves"? Give two examples of people pursuing immediate gratification that their longrun selves would not appreciate.

Shawn Van Dyke, a construction industry consultant, wrote on a home building site: Brains do some pretty funny things when making a buying decision. If you understand your customers' brain activities, then you can use this knowledge to help increase your sales and deliver on value. $\dots$ There's an old question in advertising. "How do you sell a $\mathrm{\$}2,000$ watch? Put it next to a $\mathrm{\$}10,000$ watch." This is an example of price anchoring. a. What is price anchoring? b. Explain why Van Dyke cited the "old advertising question" as an example of price anchoring.