utline Choosing the Best Feasible Option Application ...homepage.ntu.edu.tw/~luohm/econ2019f/chapter3.pdf · Apartment Options Exhibit m. Commuting Cost and Rental Cost Expressed

Outline Choosing the Best Feasible Option Application: Renting the Optimal Apartment Marginal Analysis

Part I: Introduction to Economics1. ae Principles and Practice of Economics2. EconomicMethods and Economic Questions3. Optimization: Doing the Best You Can4. Demand, Supply, and Equilibrium

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Chapter 3Optimization: Doing the Best You

Can

2019.9.20.

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Optimization: Choosing the Best Feasible Option

Optimization in Application: Renting the Optimal Apartment

Optimization Using Marginal Analysis (邊際分析)

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● When an economic agent chooses the best feasibleoption, she is optimizing.● Optimization using total value calculates the totalvalue of each feasible option and then picks theoption with the highest total value.

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● Optimization using marginal analysis calculatesthe change in total value when a person switchesfrom one feasible option to another, and then usesthesemarginal comparisons to choose the optionwith the highest total value.● Optimization using total value and optimizationusing marginal analysis give identical answers.

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How does location aòect the rental cost of housing?

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3.1 Optimization: Choosing the BestFeasible Option

● Economists believe that people usuallymake choices bytrying to select best feasible option, given the availableinformation. aat is, people optimize.

● To an economist, seemingly unrelated decisions are allconnected by the unifying principle of optimization.

● Economists believe that people’s behavior is approximated byoptimization.

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Sometimes it is diõcult to make choices because● You have limited information.● Sorting through information can be complicated.● You are inexperienced in dealing with a givensituation.

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Do People Really Optimize?● Research has broadly concluded that optimization is a good

model of economic behavior in most, though not all,situations.

● One ûeld of economics—behavior economics— identiûesthe speciûc situations in which people fail to optimize.

● When people have self control problems— likeprocrastination (拖延), or addiction— optimization is not agood description of behavior.

● People also tend to fail as optimizers when they are new to atask.

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3.2 Optimization in Application: Rentingthe Optimal Apartment

Exhibit 3.1 Apartments on Your Short List,Which Diòer Onlyon Commuting Time and Rent and Are Otherwise Identical

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Optimization using total value1. Translate all costs and beneûts into common units,

like dollars permonth.2. Calculate the total net beneût of each alternative.3. Pick the alternative with the highest net beneût.

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What does it cost to commute?● Availability of public transportation● Gasoline● Parking● Wear and tear on car● Opportunity cost of time

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Apartment Options

● You need to combine the cost of rent and the cost ofcommuting time.

● Suppose the opportunity cost of commuting time is $10 perhour.

● 20 hours of commuting time (Apartment Very Far) cost $10× 20 =$200 permonth.

● Total cost of the Apartment Very Far is $1,200 permonth.13 / 27


Apartment Options

Exhibit 3.2 Commuting Cost and Rental Cost Expressed in Common Units,Assuming an Opportunity Cost of Time of $10/hour

● What is the answer to our optimization problem?

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Exhibit 3.3 Total Cost Including Both Rent and Commuting Cost, Assuming anOpportunity Cost of Time of $10/hour

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Comparative Statics (比較靜態分析)● Comparative Statics is the comparison of economic

outcomes before and a�er some economic variable ischanged.

● What happens if the opportunity cost of commuting time is$15 per hour.

Apartment Options

Exhibit 3.4 Commuting Cost and Rental Cost Expressed in Common Units,Assuming an Opportunity Cost of Time of $15/hour

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Exhibit 3.6 Total Cost Curves with the Opportunity Cost of TimeEqual to $10/hour and $15/hour

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3.3 Optimization Using Marginal Analysis(邊際分析)

Marginal Analysis:

1. Translate all costs and beneûts into common units, likedollars permonth.

2. Calculate themarginal consequences ofmoving betweenalternatives.

3. Apply the Principle of Optimization at theMargin bychoosing the best alternative with the property thatmovingto itmakes you better oò andmoving away from itmakesyou worse oò.

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A Comparison of the Apartments:

Exhibit 3.7 Relationship Between Levels and Diòerences (Margins),Assuming a $10/hour Opportunity Cost of Time

● Marginal cost is the extra cost generated bymoving fromone feasible alternative to the next feasible alternative.

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● Principle ofOptimization at theMarginIf an option is the best choice, you will bemade better oò asyoumove toward it, and worse oò as youmove away from it.

● Apartment Far is the optimum.

Exhibit 3.8 Total Cost of Each Apartment and theMarginal Cost ofMoving Between Apartments, Assuming an Opportunity Cost of $10/hour

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Q:How does location aòect the rental cost of housing?21 / 27


Exhibit 3.9 Apartment Rent in Portland, Oregon, Depends on Distance fromthe City Center

● A study by Economists BethWilson and James Frew on thehousing market in Portland, Oregan.

● Holding all other features of the apartments constant exceptfor the distance to the city center. 22 / 27


● Why do rental prices fall as youmove farther away from thecity center?

● ae optimizers with the highest opportunity cost of timepush up the rental price of apartments with the shortestcommutes.

● Market prices have the eòect of allocating the downtownapartments to the people who are willing to pay themost forthem.

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● How society should determine the price of scarce resources,like downtown apartments.

● Should we have a system that allows optimizing landlordsand optimizing renters to negotiate freely to determinerental prices for apartment?

● What if this produces a system in which the highest-paidworkers are the only ones who can aòord to live in themostconvenient apartments?

● Is that inequitable ?● Can you think of a better way to allocate apartments?

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邊際分析的例子:1. 健保保費與部分負擔。

問: 為什麼健保資源容易浪費? 如何減少健保資源

的浪費?2. 燃料費隨車徵收或隨油徵收。

問: 何者較能夠減少二氧化碳排放?

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3. 垃圾費隨水費或隨袋徵收?問: 何者能夠使垃圾減量?

台北市的垃圾費與垃圾量

平均每人年產垃圾費計價方式

年度垃圾(公斤)

1996 576 水費之 50% 隨水費徵收

1997 561 水費之63% 隨水費徵收

1998 593 6.3元/度自來水隨水費徵收

1999 533 7.3元/度自來水隨水費徵收

2000 481 4.0元/度自來水,0.5元/公升 2000.7.1起隨袋徵收

2001 377 0.5, 0.45/公升隨袋徵收

2002 281 0.45/公升隨袋徵收

2003 251 0.45/公升隨袋徵收

2004 226 0.45/公升廚餘回收

2005 205 0.45/公升廚餘回收

2006 199 0.45/公升廚餘回收

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4. YouBike 前半小時由免費改為5元, 使用量⋯

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utline Choosing the Best Feasible Option Application ...homepage.ntu.edu.tw/~luohm/econ2019f/chapter3.pdf · Apartment Options Exhibit m. Commuting Cost and Rental Cost Expressed