Monday, January 29, 2018

Is food demand at football games elastic?

"Yes" is the answer from the Atlanta Falcons:

Steve Cannon, CEO of the AMB Group, Blank's holding company, told ESPN that although food and beverage prices were 50 percent lower in its new Mercedes-Benz Stadium than the prices in the Georgia Dome the previous year, fans spent 16 percent more.

As a first approximation,
(% Change in Revenue) = (% Change in Price) + (Change in Quantity)

In this case, 16% = -(50%) + X, or X = 66%.  In words, revenue increased because the 50% drop in price was more than offset by the increase in quantity because food demand was much more elastic than the Falcons previously thought--otherwise they would have lowered prices last year. 

To maximize profit on food sales, set MR=MC which implies (Price-MC)/P=1/|elasticity|.  In this case, with an estimated elasticity of -1.32=66/50, the optimal margin on food is 76%. 

HT:  Justin

Saturday, January 27, 2018

Good story of the 2008 housing recession

From a reporter who bought at the height of the housing bubble, then held onto an underwater property for a decade, and then finally sold at a $50,000 loss.  Love the last paragraph:
At a wedding I attended recently, I met a real-estate broker who touted the riches to be made by buying units in the glassy residential towers popping up along the waterfront in Brooklyn, where I live. No matter how slapdash the construction, she said, prices have only one direction to go.  
I had sunglasses on. She didn’t see me rolling my eyes.

Wednesday, January 24, 2018

Video Game Arcade Bundling


"Geek Mania" in Madison ,WI does not price arcade games per game played. Instead, it sets an admission price and allows patrons to play as much as they desire. This is similar to Walter Oi's "Disneyland Dilemma" when Disneyland went from per ride tickets to a single price of admission.

Tuesday, January 23, 2018

Entry Barriers for Opticians

A new paper by Timmons and Mills,"Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States," examines the effects of labor market entry barriers. The argument for occupational licensing is that it can serve to assure the quality of practitioners. The argument against is that it restricts supply and drives up prices. Timmons and Mills find no evidence of the former but:
Our results suggest that optician licensing is associated with opticians receiving as much as 16.9 percent more in annual earnings. 

I don't think I have yet seen an example in which occupational licensing was found to improve quality and/or does not raise costs. This is why most economists who study the matter prefer to allow market mechanisms (e.g., warranties, reputation, third party reviews) assure quality rather than government regulation.

Friday, January 19, 2018

Can I take credit for this?

Former student Ford Scudder (NJ state treasurer) must have been paying attention in class, as he reduced the discount rates for NJ defined benefits pension system from 7.9% down to 7%.  The move is controversial as it increases the amount that NJ must set aside for its generous retirement benefits:
The decision will likely increase what the state will have to pay into the pension system next year by $234 million, according to the Treasury Department. Instead of a $3 billion pension contribution in his first budget, Murphy [the new Governor] would likely have to make a $3.2 billion contribution under that estimate.
But it is better in the long run:
“Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return,” Rijksen said. “Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country, with some other 20 state pension plans having adopted or being in the process of moving to an assumed rate of return at 7 percent or below.”
Readers of this blog will know that I motivate the topics of discounting and its inverse, compounding, with use our under-funded defined-benefits pensions.  Here is a recent post about another fund, from another under-funded state, doing the same thing:

Thursday, February 2, 2017


Another pension fund lowers discount rate to 7%

If a pension fund has to pay out $100 in 30 years, and earns 7.5% on its investments, it must save 100/(1.075)^30=13.14 today.  If it earns only 7.0%, the amount that it much save increases by 15%.

Calstrs, the second biggest pension fund in the world, just admitted that it is reducing its target rate of return (also its discount rate) from 7.5% to 7.0%.  The increase in savings is split between the teachers and the State of California, the employer of the teachers.
Approximately 80,000 current members of Calstrs could see an increase in their yearly pension contributions of $200 or more as a result of Thursday’s move, Calstrs said. The state of California has already budgeted an extra $153 million for its pension contribution to cover the rate change, bringing the total contribution to $2.8 billion.

Thursday, January 18, 2018

MC of a Restaurant Meal

The Washington City Paper did a nice piece on the marginal costs of different popular meals in DC. In most cases, they calculated the marginal food cost because it is difficult to figure out how much of the other inputs (e.g., labor) is marginal to a meal. Still this is an informative exercise. I wonder how often the restaurants take the next step to compare actual markups to desired markups? For example, the margin on the Baan Thai Vermicelli (left) seems way to low.