1 00:00:00,500 --> 00:00:02,495 [SQUEAKING] 2 00:00:02,495 --> 00:00:03,992 [RUSTLING] 3 00:00:03,992 --> 00:00:10,772 [CLICKING] 4 00:00:10,772 --> 00:00:12,230 JONATHAN GRUBER: Today, we're going 5 00:00:12,230 --> 00:00:15,480 to continue our discussion of consumer choice. 6 00:00:15,480 --> 00:00:17,490 And we're going to talk now about what 7 00:00:17,490 --> 00:00:20,310 happens when we take that unconstrained choice we talked 8 00:00:20,310 --> 00:00:24,270 about on Monday and impose budget constraints. 9 00:00:24,270 --> 00:00:26,480 We'll talk about what budget constraints are. 10 00:00:26,480 --> 00:00:28,470 We'll then come to talking about how consumers 11 00:00:28,470 --> 00:00:30,210 make constrained choices. 12 00:00:30,210 --> 00:00:33,670 And then we'll end with an example of food stamps. 13 00:00:33,670 --> 00:00:36,410 So let's start by talking about budget constraints. 14 00:00:41,740 --> 00:00:46,990 And we'll start by talking about their construction, 15 00:00:46,990 --> 00:00:48,970 the construction of budget constraints. 16 00:00:48,970 --> 00:00:53,020 So, basically, last time, we talked 17 00:00:53,020 --> 00:00:55,270 about the fundamental axiom of consumer choice 18 00:00:55,270 --> 00:00:56,690 that more is better. 19 00:00:56,690 --> 00:00:59,410 So what stops people from just bingeing on everything? 20 00:00:59,410 --> 00:01:00,910 It's their budget constraint. 21 00:01:00,910 --> 00:01:02,860 It's their limited resources. 22 00:01:02,860 --> 00:01:05,410 Now, for most of this course, we're 23 00:01:05,410 --> 00:01:09,580 going to make a simplifying assumption that your budget-- 24 00:01:09,580 --> 00:01:11,680 that is what you spend-- 25 00:01:11,680 --> 00:01:14,020 equals your income. 26 00:01:14,020 --> 00:01:16,360 That is what you earn, OK? 27 00:01:16,360 --> 00:01:20,080 That is there won't be any savings or borrowing, OK? 28 00:01:20,080 --> 00:01:22,110 Now that is a simplifying assumption. 29 00:01:22,110 --> 00:01:23,860 And, indeed, we'll spend a couple lectures 30 00:01:23,860 --> 00:01:26,110 at the end of the semester talking about what happens 31 00:01:26,110 --> 00:01:28,780 when people can save or borrow. 32 00:01:28,780 --> 00:01:31,150 That said, this is not a terrible description 33 00:01:31,150 --> 00:01:32,500 of most Americans. 34 00:01:32,500 --> 00:01:36,220 The median American household has $400 in the bank. 35 00:01:36,220 --> 00:01:38,770 So this is not kind of a terrible description 36 00:01:38,770 --> 00:01:41,530 of the way most people live their lives in America, 37 00:01:41,530 --> 00:01:43,270 which is what they earn each week is 38 00:01:43,270 --> 00:01:44,890 what they spend each week. 39 00:01:44,890 --> 00:01:46,605 So that's what we'll do. 40 00:01:46,605 --> 00:01:48,730 It also might not be sort of a terrible description 41 00:01:48,730 --> 00:01:50,195 of your life. 42 00:01:50,195 --> 00:01:52,570 I presume, in college, you're not doing a lot of savings. 43 00:01:52,570 --> 00:01:54,640 You maybe do a little borrowing, but not 44 00:01:54,640 --> 00:01:56,493 a lot of savings or borrowing. 45 00:01:56,493 --> 00:01:57,910 So what we're going to do is we're 46 00:01:57,910 --> 00:01:59,440 going to assume that's true for you as well. 47 00:01:59,440 --> 00:02:01,570 We're going to assume your parents have given you 48 00:02:01,570 --> 00:02:03,160 some amount of money to spend. 49 00:02:03,160 --> 00:02:06,760 We'll call it Y. Your income Y is the amount of money 50 00:02:06,760 --> 00:02:09,740 your parents have given you to spend for say 51 00:02:09,740 --> 00:02:11,800 the semester or the month. 52 00:02:11,800 --> 00:02:14,530 And, once again, let's say all you spend your money on 53 00:02:14,530 --> 00:02:16,070 is pizza and cookies, OK? 54 00:02:16,070 --> 00:02:18,100 That's all you want to spend your money on. 55 00:02:18,100 --> 00:02:20,140 We write the budget constraint as saying 56 00:02:20,140 --> 00:02:23,830 that your resources, your income Y, 57 00:02:23,830 --> 00:02:26,980 can be spent on either pizza or cookies. 58 00:02:26,980 --> 00:02:30,080 And the constraint is that you could spend it-- 59 00:02:30,080 --> 00:02:34,510 that budget has to be divided between pizza, where there's 60 00:02:34,510 --> 00:02:37,720 the price per slice of pizza times the number of slice 61 00:02:37,720 --> 00:02:40,670 of pizza, or cookies. 62 00:02:40,670 --> 00:02:44,370 We have the price per cookie times the number of cookies. 63 00:02:44,370 --> 00:02:47,420 So p sub p is the price per slice of pizza. 64 00:02:47,420 --> 00:02:50,510 p sub c is the price per cookie. 65 00:02:50,510 --> 00:02:54,090 P is the number of pizzas, and C is the number of cookies. 66 00:02:54,090 --> 00:02:55,340 That's your budget constraint. 67 00:02:55,340 --> 00:02:58,520 You can essentially devote your income 68 00:02:58,520 --> 00:03:01,092 to some combination of pizza and cookies, 69 00:03:01,092 --> 00:03:03,050 but you have to consider how much they actually 70 00:03:03,050 --> 00:03:05,540 cost in doing that. 71 00:03:05,540 --> 00:03:07,680 I find this easier to see graphically. 72 00:03:07,680 --> 00:03:10,270 So let's turn to figure 3-1. 73 00:03:10,270 --> 00:03:12,845 Figure 3-1 shows a budget constraint. 74 00:03:12,845 --> 00:03:14,470 So how does the budget constraint look? 75 00:03:14,470 --> 00:03:17,500 Well, the x-axis is your income divided 76 00:03:17,500 --> 00:03:18,970 by the price of cookies. 77 00:03:18,970 --> 00:03:22,380 That is, if you decide to devote all your income to cookies, 78 00:03:22,380 --> 00:03:24,340 then how many cookies can you have? 79 00:03:24,340 --> 00:03:26,320 Y over pc. 80 00:03:26,320 --> 00:03:28,960 If your income is $100, and cookies are $10-- 81 00:03:28,960 --> 00:03:30,850 that means you're going to Insomnia Cookies-- 82 00:03:30,850 --> 00:03:34,660 then you can only have 10 cookies, et cetera. 83 00:03:34,660 --> 00:03:39,210 Likewise, the y-intercept is the income 84 00:03:39,210 --> 00:03:40,460 divided by the price of pizza. 85 00:03:40,460 --> 00:03:43,170 That's how many pizzas you can have. 86 00:03:43,170 --> 00:03:47,880 The budget constraint represents-- 87 00:03:47,880 --> 00:03:52,410 the budget constraint, the slope of the budget constraint, 88 00:03:52,410 --> 00:03:56,680 is the price ratio, the negative of the price ratio 89 00:03:56,680 --> 00:04:01,930 because it's a downward-sloping line, pc over pp. 90 00:04:01,930 --> 00:04:05,560 That is every extra cookie that you 91 00:04:05,560 --> 00:04:09,310 buy, holding your income constant, 92 00:04:09,310 --> 00:04:15,190 lowers the amount of pizza you can have by p sub p, OK? 93 00:04:15,190 --> 00:04:17,480 So let's consider an example. 94 00:04:17,480 --> 00:04:24,180 Suppose that Y is $96, that the price of pizza-- 95 00:04:24,180 --> 00:04:27,970 it's an expensive pizza place-- is $12, 96 00:04:27,970 --> 00:04:32,730 and the price of a cookie is $6, OK? 97 00:04:32,730 --> 00:04:36,480 $12 for pizza, this is like downtown San Francisco or New 98 00:04:36,480 --> 00:04:37,400 York. 99 00:04:37,400 --> 00:04:44,680 $96 income, $12 for a slice of pizza, $6 for a cookie, OK? 100 00:04:44,680 --> 00:04:45,180 I'm sorry. 101 00:04:45,180 --> 00:04:47,990 Y is-- I wanted to make Y 72, my bad. 102 00:04:47,990 --> 00:04:49,230 So Y is 72. 103 00:04:49,230 --> 00:04:51,650 Your income is $72, OK? 104 00:04:51,650 --> 00:04:53,400 And you can spend it on pizza and cookies, 105 00:04:53,400 --> 00:04:55,730 and those are the prices. 106 00:04:55,730 --> 00:04:59,830 Now what that means is, if you wanted just pizza, 107 00:04:59,830 --> 00:05:01,000 you could get six pizzas. 108 00:05:01,000 --> 00:05:03,880 If you wanted just cookies, you can get 12 cookies. 109 00:05:03,880 --> 00:05:06,850 And, generally, the rate at which 110 00:05:06,850 --> 00:05:12,290 you can trade off pizza for cookies is minus 1/2, OK? 111 00:05:12,290 --> 00:05:17,270 That is every additional cookie would require giving up 112 00:05:17,270 --> 00:05:19,937 half a slice of pizza, OK? 113 00:05:19,937 --> 00:05:22,520 Every additional cookie requires giving half a slice of pizza. 114 00:05:22,520 --> 00:05:27,010 That's why the slope would be negative 1/2, OK? 115 00:05:27,010 --> 00:05:30,520 So, basically, we're going to call the slope of the budget 116 00:05:30,520 --> 00:05:32,250 constraint-- 117 00:05:32,250 --> 00:05:36,150 the slope, we are going to call the Marginal Rate 118 00:05:36,150 --> 00:05:39,720 of Transformation, the MRT. 119 00:05:39,720 --> 00:05:42,720 Last time, we did the MRS, the Marginal Rate of Substitution. 120 00:05:42,720 --> 00:05:44,690 Now we're going to have MRT, the marginal rate 121 00:05:44,690 --> 00:05:48,720 of transformation, which is equal to minus pc over pp. 122 00:05:48,720 --> 00:05:53,280 Or the slope of the budget constraint, OK? 123 00:05:53,280 --> 00:05:56,650 That is the marginal rate of transformation. 124 00:05:56,650 --> 00:06:00,250 Now this class is not alchemy. 125 00:06:00,250 --> 00:06:02,770 We are not literally transforming pizza 126 00:06:02,770 --> 00:06:03,370 into cookies. 127 00:06:03,370 --> 00:06:05,578 That would be kind of cool, but we're not doing that. 128 00:06:05,578 --> 00:06:08,370 That's somewhere else at MIT, OK? 129 00:06:08,370 --> 00:06:11,770 But it's effectively doing the same thing. 130 00:06:11,770 --> 00:06:15,330 What we're doing is, given that we have a fixed amount of money 131 00:06:15,330 --> 00:06:17,920 and given that we're going to spend it all, 132 00:06:17,920 --> 00:06:20,920 the more you spend on pizza, the less you spend on cookies. 133 00:06:20,920 --> 00:06:22,780 So you're effectively transforming pizza 134 00:06:22,780 --> 00:06:24,700 into cookies and vice versa because you're 135 00:06:24,700 --> 00:06:25,950 going to spend all your money. 136 00:06:25,950 --> 00:06:27,450 You've got to spend it on something. 137 00:06:27,450 --> 00:06:29,920 So, the more you spend on one, the less you get of another. 138 00:06:29,920 --> 00:06:31,337 So, through the budget constraint, 139 00:06:31,337 --> 00:06:34,870 we are effectively transforming one good to the other. 140 00:06:34,870 --> 00:06:37,610 By having more of one, we're getting less of the other. 141 00:06:37,610 --> 00:06:39,110 So that's the sense in which we call 142 00:06:39,110 --> 00:06:40,777 it the marginal rate of transportation-- 143 00:06:40,777 --> 00:06:43,450 of transformation. 144 00:06:43,450 --> 00:06:45,660 So, basically, this comes back to the key concept 145 00:06:45,660 --> 00:06:47,940 we talked about in the very first lecture, opportunity 146 00:06:47,940 --> 00:06:49,930 cost. 147 00:06:49,930 --> 00:06:55,010 The opportunity cost of a slice of pizza is two cookies. 148 00:06:55,010 --> 00:06:57,760 Remember, opportunity cost is the value 149 00:06:57,760 --> 00:07:00,160 of the next best alternative, OK? 150 00:07:00,160 --> 00:07:02,960 The opportunity cost is the next best alternative. 151 00:07:02,960 --> 00:07:04,960 Well, here you only have two alternatives, pizza 152 00:07:04,960 --> 00:07:06,290 and cookies. 153 00:07:06,290 --> 00:07:10,480 So the opportunity cost of a slice of pizza is two cookies. 154 00:07:10,480 --> 00:07:11,980 And that's the sense in which you're 155 00:07:11,980 --> 00:07:16,880 transforming pizza into cookies or cookies into pizza, OK? 156 00:07:16,880 --> 00:07:19,550 Now this seems kind of abstract, but let's actually 157 00:07:19,550 --> 00:07:22,220 think of an organization which has taken this principle 158 00:07:22,220 --> 00:07:25,550 to heart to develop the best method of weight loss 159 00:07:25,550 --> 00:07:37,410 in America, which is Weight Watchers, OK, Weight Watchers. 160 00:07:37,410 --> 00:07:41,460 Now it turns out that dieting is super hard 161 00:07:41,460 --> 00:07:43,865 and basically doesn't work, OK? 162 00:07:43,865 --> 00:07:45,240 There's a large literature, which 163 00:07:45,240 --> 00:07:47,400 says that people go on diets all the time. 164 00:07:47,400 --> 00:07:49,800 Then they stop them, and they gain the weight back. 165 00:07:49,800 --> 00:07:53,460 OK, dieting is incredibly hard and basically doesn't work, OK? 166 00:07:53,460 --> 00:07:55,080 But a much more successful approach 167 00:07:55,080 --> 00:07:56,550 has been established by Weight Watchers. 168 00:07:56,550 --> 00:07:58,050 It's not the only approach, but it's 169 00:07:58,050 --> 00:08:00,720 been proven much more successful, OK? 170 00:08:00,720 --> 00:08:02,700 And, essentially, what does Weight Watchers do? 171 00:08:02,700 --> 00:08:06,060 They set up a budget constraint and ask you to follow it. 172 00:08:06,060 --> 00:08:09,690 So, for example, they essentially 173 00:08:09,690 --> 00:08:13,308 assign point values to every good you might consume. 174 00:08:13,308 --> 00:08:14,850 You go on the website, and everything 175 00:08:14,850 --> 00:08:17,850 in the world you might want to eat has a point value. 176 00:08:17,850 --> 00:08:21,755 They then ask, well, what weight are you today? 177 00:08:21,755 --> 00:08:22,880 What's your age and gender? 178 00:08:22,880 --> 00:08:25,080 That stuff matters for weight loss. 179 00:08:25,080 --> 00:08:27,125 And what weight do you want achieve? 180 00:08:27,125 --> 00:08:29,000 And they say, if you want to achieve a weight 181 00:08:29,000 --> 00:08:31,850 loss of x over y days, then you've 182 00:08:31,850 --> 00:08:35,400 got to limit yourself to z points. 183 00:08:35,400 --> 00:08:38,169 So, essentially, your goal is to lose weight. 184 00:08:38,169 --> 00:08:39,240 So we're going to give you the budget constraint. 185 00:08:39,240 --> 00:08:40,907 We're not going to tell you what to eat. 186 00:08:40,907 --> 00:08:42,550 That's why it's better than dieting 187 00:08:42,550 --> 00:08:44,300 because, once again, Adam Smith was right. 188 00:08:44,300 --> 00:08:45,467 People like to have choices. 189 00:08:45,467 --> 00:08:47,730 They like to let choice drive things. 190 00:08:47,730 --> 00:08:51,780 But we are going to tell you a total budget. 191 00:08:51,780 --> 00:08:54,450 So, for example, vegetables are like zero points. 192 00:08:54,450 --> 00:08:56,460 Snickers bars are like six points, et cetera. 193 00:08:56,460 --> 00:08:59,130 They have various point systems, OK? 194 00:08:59,130 --> 00:09:01,500 So, for example, suppose your budget is 30 points, which 195 00:09:01,500 --> 00:09:04,440 would be pretty typical, OK? 196 00:09:04,440 --> 00:09:06,570 Suppose you go to McDonald's for lunch, 197 00:09:06,570 --> 00:09:08,370 and you get a number one. 198 00:09:08,370 --> 00:09:10,470 The number one at McDonald's is a Big Mac, 199 00:09:10,470 --> 00:09:14,010 which has 14 points, fries, which have 10 points, 200 00:09:14,010 --> 00:09:16,720 and a Coke, which has six points. 201 00:09:16,720 --> 00:09:20,280 That's 30 points, and it's only lunch, OK? 202 00:09:20,280 --> 00:09:23,570 You've blown your whole budget for the day on lunch. 203 00:09:23,570 --> 00:09:26,420 Now you could just get depressed and say screw it. 204 00:09:26,420 --> 00:09:27,777 I'll just be fat. 205 00:09:27,777 --> 00:09:29,360 But, clearly, looking around the room, 206 00:09:29,360 --> 00:09:32,050 you guys have not made that choice. 207 00:09:32,050 --> 00:09:33,800 Or you could look at the budget constraint 208 00:09:33,800 --> 00:09:35,690 and say, well, what else can I get. 209 00:09:35,690 --> 00:09:38,270 Well, it turns out you can get a 10-piece nugget, which 210 00:09:38,270 --> 00:09:41,300 is 12 points, apple slices, which is one point, 211 00:09:41,300 --> 00:09:43,160 and a Diet Coke, which is zero points, 212 00:09:43,160 --> 00:09:45,260 for a total of only 13 points. 213 00:09:45,260 --> 00:09:48,015 Now you have 13 points and plenty of room for dinner. 214 00:09:48,015 --> 00:09:49,640 Now, to be honest, anyone who tells you 215 00:09:49,640 --> 00:09:52,760 that second lunch is as good as that first lunch is a liar, OK? 216 00:09:52,760 --> 00:09:55,250 I'd much rather a Big Mac and fries and a Coke than nuggets 217 00:09:55,250 --> 00:09:56,500 and apple slice and Diet Coke. 218 00:09:56,500 --> 00:09:57,440 Give me a break. 219 00:09:57,440 --> 00:10:01,920 But I'd also much rather have dinner, OK? 220 00:10:01,920 --> 00:10:04,950 So, basically, this lets you make the trade-off 221 00:10:04,950 --> 00:10:07,470 by imposing a budget constraint, by setting 222 00:10:07,470 --> 00:10:09,810 relative prices across goods. 223 00:10:09,810 --> 00:10:11,330 The points are like utils. 224 00:10:11,330 --> 00:10:12,520 They're not meaningful. 225 00:10:12,520 --> 00:10:14,255 They're only meaningful relatively. 226 00:10:14,255 --> 00:10:17,950 It lets you set relative prices across goods 227 00:10:17,950 --> 00:10:19,540 and then it lets you, essentially, 228 00:10:19,540 --> 00:10:22,210 optimize across those various-- 229 00:10:22,210 --> 00:10:23,980 across those various goods. 230 00:10:23,980 --> 00:10:26,170 So budget constraints, essentially, 231 00:10:26,170 --> 00:10:29,290 by setting up this marginal rate of transformation, 232 00:10:29,290 --> 00:10:32,054 can help with a lot of kind of decisions in life. 233 00:10:32,054 --> 00:10:36,330 OK, questions about that? 234 00:10:36,330 --> 00:10:38,848 OK, now what happens if we shock the budget constraint? 235 00:10:38,848 --> 00:10:40,390 So we talked about constructing them. 236 00:10:40,390 --> 00:10:42,550 What about shocking the budget constraint? 237 00:10:42,550 --> 00:10:44,425 We're going to do a lot in this class of what 238 00:10:44,425 --> 00:10:46,967 we call comparative statics, which is, essentially, 239 00:10:46,967 --> 00:10:48,550 making changes in one thing or another 240 00:10:48,550 --> 00:10:50,780 and seeing what it does to the system. 241 00:10:50,780 --> 00:10:52,910 So let's talk about shocking the budget constraint. 242 00:10:52,910 --> 00:10:55,060 Let's start first with a change in prices. 243 00:10:55,060 --> 00:11:04,250 Suppose the price of pizza goes from $12 up to $18. 244 00:11:04,250 --> 00:11:07,860 This is a really good slice of pizza, OK? 245 00:11:07,860 --> 00:11:09,700 Well, what happens to the budget constraint? 246 00:11:09,700 --> 00:11:12,490 Let's look at figure 3-2. 247 00:11:12,490 --> 00:11:14,800 Figure 3-2 shows what happens. 248 00:11:14,800 --> 00:11:18,010 You have your original budget constraint BC1. 249 00:11:18,010 --> 00:11:24,040 The equation of that line is 12P plus 6C equals 72, OK? 250 00:11:24,040 --> 00:11:26,302 The price of pizza and the number of slices of pizza 251 00:11:26,302 --> 00:11:28,510 plus the price of cookies times the number of cookies 252 00:11:28,510 --> 00:11:29,810 equals 72. 253 00:11:29,810 --> 00:11:32,120 Now the price of pizza has gone up. 254 00:11:32,120 --> 00:11:35,210 What that's done is that has pivoted inward your budget 255 00:11:35,210 --> 00:11:37,870 constraint to BC2. 256 00:11:37,870 --> 00:11:41,110 It has flattened the budget constraint 257 00:11:41,110 --> 00:11:44,200 because the slope, remember, is the ratio 258 00:11:44,200 --> 00:11:48,310 of the price of cookies to the price of pizza, right? 259 00:11:48,310 --> 00:11:49,330 That's a ratio. 260 00:11:49,330 --> 00:11:51,520 Well, that ratio has just fallen. 261 00:11:51,520 --> 00:11:53,050 It used to be a 1/2. 262 00:11:53,050 --> 00:11:54,360 Now it's a 1/3. 263 00:11:54,360 --> 00:11:56,110 Negative 1/2-- well, it used to be a half. 264 00:11:56,110 --> 00:11:56,735 Now it's a 1/3. 265 00:11:56,735 --> 00:12:00,880 So the slope has fallen from negative 1/2 to negative 1/3. 266 00:12:00,880 --> 00:12:03,940 So what's happened is you can still have as many cookies 267 00:12:03,940 --> 00:12:05,350 as you had before. 268 00:12:05,350 --> 00:12:08,690 The y-intercept has not changed, but you 269 00:12:08,690 --> 00:12:10,440 can have fewer slices of pizza. 270 00:12:10,440 --> 00:12:13,150 That's why it's a pivot because one price has not 271 00:12:13,150 --> 00:12:14,400 changed, only the other price. 272 00:12:14,400 --> 00:12:16,402 So it's a pivot inward. 273 00:12:16,402 --> 00:12:17,860 The other thing here, you'll notice 274 00:12:17,860 --> 00:12:21,070 we have all these funny dots and stuff, OK? 275 00:12:21,070 --> 00:12:22,930 That represents what has happened 276 00:12:22,930 --> 00:12:30,280 to what we call your opportunity set, your opportunity 277 00:12:30,280 --> 00:12:35,080 set, which is an important concept, OK? 278 00:12:35,080 --> 00:12:39,900 Your opportunity set is the set of choices available to you 279 00:12:39,900 --> 00:12:43,440 given your income and market prices, 280 00:12:43,440 --> 00:12:46,550 the set of choices available to you given your income 281 00:12:46,550 --> 00:12:48,500 and market prices. 282 00:12:48,500 --> 00:12:50,570 So your opportunity set initially 283 00:12:50,570 --> 00:12:54,440 was the black dots plus the red dots. 284 00:12:54,440 --> 00:12:57,140 Now your opportunity set has shrunk. 285 00:12:57,140 --> 00:13:00,930 Your opportunity set is now just the black dots. 286 00:13:00,930 --> 00:13:03,900 Given your income, you can now get 287 00:13:03,900 --> 00:13:07,710 less stuff, same amount of cookies, but less pizza. 288 00:13:07,710 --> 00:13:09,060 And you are worse off. 289 00:13:09,060 --> 00:13:11,905 Your opportunity set has shrunk. 290 00:13:11,905 --> 00:13:14,280 Your opportunity set-- even though your parents are still 291 00:13:14,280 --> 00:13:18,800 sending you the same check, you are worse off because you can 292 00:13:18,800 --> 00:13:22,950 now buy less pizza with it, OK? 293 00:13:22,950 --> 00:13:25,495 So that's what happens to the opportunity set 294 00:13:25,495 --> 00:13:26,370 when a price changes. 295 00:13:26,370 --> 00:13:27,990 And, likewise, you should show to yourself 296 00:13:27,990 --> 00:13:30,540 the same thing will happen when the price of cookies change. 297 00:13:30,540 --> 00:13:32,040 In that case, you'll get an increase 298 00:13:32,040 --> 00:13:34,710 in the steepness of the budget constraint, OK? 299 00:13:34,710 --> 00:13:36,570 But your opportunity set will still-- 300 00:13:36,570 --> 00:13:40,810 your opportunity set will still shrink, OK? 301 00:13:40,810 --> 00:13:42,560 Now what about-- yeah? 302 00:13:42,560 --> 00:13:44,477 AUDIENCE: Don't we not care about all the dots 303 00:13:44,477 --> 00:13:45,750 below the line, though, because we're assuming 304 00:13:45,750 --> 00:13:47,130 we're spending all the money? 305 00:13:47,130 --> 00:13:49,100 JONATHAN GRUBER: Well, that's a good point, 306 00:13:49,100 --> 00:13:49,910 and we're going to come back to that. 307 00:13:49,910 --> 00:13:52,130 We haven't-- we assume they're spending all their money, 308 00:13:52,130 --> 00:13:53,630 but it's just a way of representing. 309 00:13:53,630 --> 00:13:56,968 You could think of the line being lower as the same thing. 310 00:13:56,968 --> 00:13:58,760 We care about-- we just care about the area 311 00:13:58,760 --> 00:14:00,813 because it represents the set, but you're right. 312 00:14:00,813 --> 00:14:02,480 You could just focus on the line and say 313 00:14:02,480 --> 00:14:04,490 the line is everywhere lower. 314 00:14:04,490 --> 00:14:05,690 So they're worse off. 315 00:14:05,690 --> 00:14:07,380 That's another way to look at it. 316 00:14:07,380 --> 00:14:08,880 But we like to think about as a set. 317 00:14:08,880 --> 00:14:12,580 It comes in handy later for various reasons, OK? 318 00:14:12,580 --> 00:14:13,970 But that's a good question. 319 00:14:13,970 --> 00:14:15,950 Now let's ask about a second thing. 320 00:14:15,950 --> 00:14:17,660 What if your income goes up? 321 00:14:17,660 --> 00:14:20,180 What if prices are back to 12 and 6, 322 00:14:20,180 --> 00:14:22,940 but your parents decide to send you more money? 323 00:14:22,940 --> 00:14:25,952 Suppose your parents-- or send you less money. 324 00:14:25,952 --> 00:14:28,160 It turns out you haven't been paying enough attention 325 00:14:28,160 --> 00:14:28,820 in 14.01. 326 00:14:28,820 --> 00:14:29,812 You're parents are mad. 327 00:14:29,812 --> 00:14:30,770 They're monitoring you. 328 00:14:30,770 --> 00:14:32,540 That's why we have the camera here. 329 00:14:32,540 --> 00:14:36,242 This goes directly to all your parents, OK? 330 00:14:36,242 --> 00:14:39,470 I'm sort of joking. 331 00:14:39,470 --> 00:14:43,570 And so let's say parents cut your allowance to $60, OK? 332 00:14:43,570 --> 00:14:44,570 Well, what does that do? 333 00:14:44,570 --> 00:14:46,800 That's in figure 3-3. 334 00:14:46,800 --> 00:14:51,340 OK, in figure 3-3, the old budget constraint 335 00:14:51,340 --> 00:14:53,180 was that you get pizzas and cookies 336 00:14:53,180 --> 00:14:55,180 at a price of $6 and $12, and you could get them 337 00:14:55,180 --> 00:14:57,040 until you spend $72. 338 00:14:57,040 --> 00:14:59,830 Now you can only get them until you spend $60. 339 00:14:59,830 --> 00:15:02,260 Now what we see is not a pivot in the budget constraint, 340 00:15:02,260 --> 00:15:05,042 but an inward shift in the budget constraint, 341 00:15:05,042 --> 00:15:07,000 because the relative price of pizza and cookies 342 00:15:07,000 --> 00:15:08,230 has not changed. 343 00:15:08,230 --> 00:15:10,075 Therefore, the slope hasn't changed. 344 00:15:10,075 --> 00:15:12,700 OK, the slope is dictated solely-- 345 00:15:12,700 --> 00:15:14,590 you don't do anything to control the slope. 346 00:15:14,590 --> 00:15:17,560 The market controls the slope, OK? 347 00:15:17,560 --> 00:15:21,370 But you and your family control the level, 348 00:15:21,370 --> 00:15:23,180 and the level has shrunk. 349 00:15:23,180 --> 00:15:25,750 So you're pivoting inwards, OK? 350 00:15:25,750 --> 00:15:27,880 And, once again, now, instead of being 351 00:15:27,880 --> 00:15:31,090 able to buy say 12 cookies and six pizzas, 352 00:15:31,090 --> 00:15:33,850 now you can only buy say 10 cookies and five pizzas. 353 00:15:33,850 --> 00:15:36,400 That's the most you can get, OK? 354 00:15:36,400 --> 00:15:39,310 So, once again, your opportunity set has been restricted, 355 00:15:39,310 --> 00:15:43,722 but in a different kind of way through this pivot inward, OK? 356 00:15:43,722 --> 00:15:45,180 So that's how we sort of manipulate 357 00:15:45,180 --> 00:15:46,222 these budget constraints. 358 00:15:46,222 --> 00:15:48,475 And we're going to come back to that next lecture. 359 00:15:48,475 --> 00:15:49,350 That'll be important. 360 00:15:49,350 --> 00:15:49,935 Yeah? 361 00:15:49,935 --> 00:15:51,768 AUDIENCE: So, in looking at the differences, 362 00:15:51,768 --> 00:15:54,210 can like an increase in the price of pizza 363 00:15:54,210 --> 00:15:55,940 or like a decrease in your budget-- 364 00:15:55,940 --> 00:15:58,032 is it more showing that like the change in slopes 365 00:15:58,032 --> 00:15:59,490 doesn't really affect you if you're 366 00:15:59,490 --> 00:16:01,690 like say buying more cookies than pizza? 367 00:16:01,690 --> 00:16:03,760 But like, in terms of if your budget as a whole 368 00:16:03,760 --> 00:16:05,910 decreases, then it affects you overall. 369 00:16:05,910 --> 00:16:06,930 JONATHAN GRUBER: That's a great question, 370 00:16:06,930 --> 00:16:08,370 and we're going to actually answer that question 371 00:16:08,370 --> 00:16:09,780 next lecture very explicitly. 372 00:16:09,780 --> 00:16:11,370 So hold on to that question, and we'll 373 00:16:11,370 --> 00:16:13,500 talk about we're going to compare explicitly 374 00:16:13,500 --> 00:16:16,035 why income changes differ from price changes 375 00:16:16,035 --> 00:16:17,660 and what are the underlying mechanisms. 376 00:16:17,660 --> 00:16:18,310 Yeah? 377 00:16:18,310 --> 00:16:21,140 AUDIENCE: How do you determine your marginal rate 378 00:16:21,140 --> 00:16:22,760 of transformation? 379 00:16:22,760 --> 00:16:24,990 How do determine your-- like say it wasn't just 380 00:16:24,990 --> 00:16:25,780 pizza and cookies. 381 00:16:25,780 --> 00:16:27,500 Like say it was more products. 382 00:16:27,500 --> 00:16:29,785 How would you determine that value? 383 00:16:29,785 --> 00:16:31,410 JONATHAN GRUBER: Great, great question. 384 00:16:31,410 --> 00:16:33,060 So, as I said, we always are going 385 00:16:33,060 --> 00:16:35,410 to start with simplifying assumptions to make life easy. 386 00:16:35,410 --> 00:16:37,260 There's no reason that this couldn't 387 00:16:37,260 --> 00:16:38,750 be written in three dimensions. 388 00:16:38,750 --> 00:16:40,050 And you'd have relative marginal rates 389 00:16:40,050 --> 00:16:42,425 of transformation, rates at which you're willing to trade 390 00:16:42,425 --> 00:16:43,703 off various things. 391 00:16:43,703 --> 00:16:45,870 So you could just extend the math in all dimensions. 392 00:16:45,870 --> 00:16:47,662 It wouldn't add any richness, and it'd just 393 00:16:47,662 --> 00:16:49,200 make your head spin. 394 00:16:49,200 --> 00:16:51,540 But the basic-- so all the basic ideas 395 00:16:51,540 --> 00:16:53,350 can come across with two goods, but it'd 396 00:16:53,350 --> 00:16:56,288 be the same mechanics with more goods, OK? 397 00:16:56,288 --> 00:16:58,830 You essentially, when we get to the constrained optimization, 398 00:16:58,830 --> 00:17:01,020 you'll essentially have more first-order conditions 399 00:17:01,020 --> 00:17:02,440 in your constrained optimization. 400 00:17:02,440 --> 00:17:04,440 That's the way to think about it. 401 00:17:04,440 --> 00:17:06,609 OK, so let's-- actually, that's a great segue. 402 00:17:06,609 --> 00:17:08,349 Let's turn to the second part, which 403 00:17:08,349 --> 00:17:12,430 is how we use budget constraints and the utility 404 00:17:12,430 --> 00:17:17,109 function we learned about last time to actually describe 405 00:17:17,109 --> 00:17:19,369 how consumers make choices. 406 00:17:19,369 --> 00:17:20,900 So we're going to take utility. 407 00:17:20,900 --> 00:17:22,869 Remember, I said last time consumers 408 00:17:22,869 --> 00:17:25,630 are going to maximize their utility subject to a budget 409 00:17:25,630 --> 00:17:26,381 constraint. 410 00:17:26,381 --> 00:17:28,089 Well, now we've taught you about utility. 411 00:17:28,089 --> 00:17:29,900 We've taught you about budget constraints. 412 00:17:29,900 --> 00:17:31,990 Let's put them together, OK? 413 00:17:31,990 --> 00:17:36,340 How to consume-- how do consumers put them together? 414 00:17:36,340 --> 00:17:40,360 Well, graphically, the representation of preferences 415 00:17:40,360 --> 00:17:42,100 was our indifference curves. 416 00:17:42,100 --> 00:17:43,930 That represented people's indifference 417 00:17:43,930 --> 00:17:45,430 with further out indifference curves 418 00:17:45,430 --> 00:17:46,660 made people happy, right? 419 00:17:46,660 --> 00:17:48,623 That was last time. 420 00:17:48,623 --> 00:17:50,790 So, essentially, what we're going to ask graphically 421 00:17:50,790 --> 00:17:53,310 is what is the highest indifference 422 00:17:53,310 --> 00:17:56,490 curve you can achieve given your budget, right? 423 00:17:56,490 --> 00:17:58,740 We know you want to be that highest indifference curve 424 00:17:58,740 --> 00:18:00,840 possible by more is better. 425 00:18:00,840 --> 00:18:02,700 So we're simply going to ask what 426 00:18:02,700 --> 00:18:04,410 is the highest indifference curve you can 427 00:18:04,410 --> 00:18:08,330 reach given your budget, OK? 428 00:18:08,330 --> 00:18:10,880 So let's consider the same utility from last time. 429 00:18:10,880 --> 00:18:15,940 Utility is square root of P times C, OK? 430 00:18:15,940 --> 00:18:20,450 And let's consider the same budget we wrote down up here-- 431 00:18:20,450 --> 00:18:26,370 $72 income, $12 price of pizza, $6 price of cookies. 432 00:18:26,370 --> 00:18:30,347 And now let's ask where can you go with that. 433 00:18:30,347 --> 00:18:32,430 So let's turn to figure 3-4 and do it graphically. 434 00:18:32,430 --> 00:18:36,390 We'll do it mathematically in a minute, OK? 435 00:18:36,390 --> 00:18:39,480 So, in figure 3-4, you have our budget constraint, 436 00:18:39,480 --> 00:18:42,060 which runs from 6 pizzas to 12 cookies. 437 00:18:42,060 --> 00:18:43,650 That's the original budget constraint. 438 00:18:43,650 --> 00:18:45,940 And you have a series of indifference curves. 439 00:18:45,940 --> 00:18:49,260 And these indifference curves, I1, I2, I3, I4, 440 00:18:49,260 --> 00:18:52,950 they all come directly from this utility function. 441 00:18:52,950 --> 00:18:54,972 So, simply, I've solved this utility function. 442 00:18:54,972 --> 00:18:56,680 I'll talk about the math in a little bit, 443 00:18:56,680 --> 00:18:59,850 and you'll do more math in section on Friday, OK? 444 00:18:59,850 --> 00:19:01,350 But, essentially, you can solve-- 445 00:19:01,350 --> 00:19:04,350 we'll show you-- you'll drive on Friday 446 00:19:04,350 --> 00:19:06,225 how you take this utility function 447 00:19:06,225 --> 00:19:08,810 and literally can draw the indifference curves from it, 448 00:19:08,810 --> 00:19:09,390 OK? 449 00:19:09,390 --> 00:19:12,570 But, for now, take my word that these indifference curves 450 00:19:12,570 --> 00:19:15,530 represent this utility function. 451 00:19:15,530 --> 00:19:21,173 And what we see is that point D is the furthest out 452 00:19:21,173 --> 00:19:23,090 indifference curve you can achieve while still 453 00:19:23,090 --> 00:19:27,070 meeting your budget, while still meeting your budget constraint. 454 00:19:27,070 --> 00:19:30,730 And, therefore, we say that the optimum, graphically, 455 00:19:30,730 --> 00:19:36,200 is the tangency between your indifference curve 456 00:19:36,200 --> 00:19:41,210 and your budget constraint is the optimal constrained bundle. 457 00:19:41,210 --> 00:19:42,210 You see how we brought-- 458 00:19:42,210 --> 00:19:44,627 last time, we talked about further out indifference curves 459 00:19:44,627 --> 00:19:45,335 make you happier. 460 00:19:45,335 --> 00:19:47,127 Today, we talked about the fact that you're 461 00:19:47,127 --> 00:19:48,120 limited by your budget. 462 00:19:48,120 --> 00:19:49,870 So we have the furthest indifference curve 463 00:19:49,870 --> 00:19:52,020 you can get to is going to be, definitionally, 464 00:19:52,020 --> 00:19:55,750 at the tangent of the indifference curve 465 00:19:55,750 --> 00:19:57,850 and the budget constraint. 466 00:19:57,850 --> 00:19:59,390 And, once again, that gives you-- 467 00:19:59,390 --> 00:20:01,560 we realize we don't want to measure utils, but, just 468 00:20:01,560 --> 00:20:03,560 for mathematical, for mathematical purpose, that 469 00:20:03,560 --> 00:20:08,840 gives utility at the tangency of square root of 18, OK? 470 00:20:08,840 --> 00:20:14,370 At that point, you are choosing six cookies and three pizzas. 471 00:20:14,370 --> 00:20:16,650 That is the choice you are making. 472 00:20:16,650 --> 00:20:21,370 That is the best off you can get given your budget. 473 00:20:21,370 --> 00:20:23,920 And, to see this, let's talk about some other points 474 00:20:23,920 --> 00:20:27,170 and why they're not better, OK? 475 00:20:27,170 --> 00:20:30,680 Let's talk about point A. Why isn't point A better? 476 00:20:30,680 --> 00:20:32,970 Why isn't it better to have two-- maybe 477 00:20:32,970 --> 00:20:34,880 you just-- maybe you like cookies a lot 478 00:20:34,880 --> 00:20:36,380 and don't like-- or like pizza a lot 479 00:20:36,380 --> 00:20:37,755 and don't like cookies that much. 480 00:20:37,755 --> 00:20:40,392 How can we say that point D is better than point A? 481 00:20:40,392 --> 00:20:40,892 Yeah? 482 00:20:40,892 --> 00:20:42,870 AUDIENCE: Because point D is on a higher indifference curve. 483 00:20:42,870 --> 00:20:44,430 JONATHAN GRUBER: It's on a higher indifference curve. 484 00:20:44,430 --> 00:20:46,290 So point D dominates point A because it's 485 00:20:46,290 --> 00:20:47,560 a higher indifference curve. 486 00:20:47,560 --> 00:20:48,060 Well, fine. 487 00:20:48,060 --> 00:20:52,327 Same person, by that logic, why not choose point E? 488 00:20:52,327 --> 00:20:53,660 AUDIENCE: It's above the budget. 489 00:20:53,660 --> 00:20:55,520 JONATHAN GRUBER: Yeah, you can't afford it. 490 00:20:55,520 --> 00:20:58,090 So the bottom line is you can see graphically 491 00:20:58,090 --> 00:21:00,960 why the tangency is the best you're going-- 492 00:21:00,960 --> 00:21:03,330 is the best you're going to do. 493 00:21:03,330 --> 00:21:05,770 OK, likewise, point C you wouldn't choose. 494 00:21:05,770 --> 00:21:10,660 Point C has the same slope. 495 00:21:10,660 --> 00:21:12,280 It has the same slope as point D. 496 00:21:12,280 --> 00:21:14,520 In other words, the slope is minus 1/2 at point C. 497 00:21:14,520 --> 00:21:17,530 You've drew a line tangent to point C. The slope will 498 00:21:17,530 --> 00:21:19,897 be minus 1/2, just like it is at point D, 499 00:21:19,897 --> 00:21:21,730 but you wouldn't be spending all your money. 500 00:21:21,730 --> 00:21:24,350 So you wouldn't choose that point either. 501 00:21:24,350 --> 00:21:25,330 Yeah? 502 00:21:25,330 --> 00:21:27,435 AUDIENCE: What if you have just three indifference 503 00:21:27,435 --> 00:21:29,310 curves so there is none that hit the tangent? 504 00:21:29,310 --> 00:21:31,640 Do you just go for one that's like the most tangent I guess? 505 00:21:31,640 --> 00:21:34,057 JONATHAN GRUBER: We're going to come to-- we're going to-- 506 00:21:34,057 --> 00:21:35,530 well, first of all, we're not going 507 00:21:35,530 --> 00:21:36,780 to have discrete indifference. 508 00:21:36,780 --> 00:21:40,560 We could have lines, and the lines could end up-- 509 00:21:40,560 --> 00:21:42,068 you could end up lying along. 510 00:21:42,068 --> 00:21:44,610 You could end up lying along a budget constraint for example. 511 00:21:44,610 --> 00:21:45,460 Or you could have-- 512 00:21:45,460 --> 00:21:46,680 you could even have utility functions, 513 00:21:46,680 --> 00:21:47,700 which just touch a budget constraint 514 00:21:47,700 --> 00:21:49,090 at one extreme or another. 515 00:21:49,090 --> 00:21:51,730 And we'll talk about those cases. 516 00:21:51,730 --> 00:21:52,285 Yeah? 517 00:21:52,285 --> 00:21:53,680 AUDIENCE: So [INAUDIBLE] utility function 518 00:21:53,680 --> 00:21:56,010 go through lines and the budget constraint, right? 519 00:21:56,010 --> 00:21:56,624 JONATHAN GRUBER: Yeah. 520 00:21:56,624 --> 00:21:58,240 AUDIENCE: Isn't this just Lagrange [INAUDIBLE]?? 521 00:21:58,240 --> 00:21:59,940 JONATHAN GRUBER: Well, let's come to the math then. 522 00:21:59,940 --> 00:22:01,820 OK, let's come to the mathematical derivation. 523 00:22:01,820 --> 00:22:02,737 So that's the graphic. 524 00:22:02,737 --> 00:22:04,460 So let's come to the math, OK? 525 00:22:04,460 --> 00:22:07,150 Now, always a bit of a tightrope act 526 00:22:07,150 --> 00:22:10,400 when I'm doing math up here on the board, so bear with me, OK? 527 00:22:10,400 --> 00:22:14,500 But the key thing is the math of constraint optimization 528 00:22:14,500 --> 00:22:17,450 is all about the marginal decision. 529 00:22:17,450 --> 00:22:20,260 Remember, it's hard to say how many cookies you want. 530 00:22:20,260 --> 00:22:24,340 It's easier to say should I have the next cookie, OK? 531 00:22:24,340 --> 00:22:26,140 It's about constraint optimization. 532 00:22:26,140 --> 00:22:29,950 And what we want to ask is we essentially want to compare 533 00:22:29,950 --> 00:22:34,640 how do you feel about trading off pizzas versus cookies 534 00:22:34,640 --> 00:22:38,690 versus what will the market let you do in sort of trading off 535 00:22:38,690 --> 00:22:40,220 pizzas versus cookies. 536 00:22:40,220 --> 00:22:42,440 That is the optimum is going to occur 537 00:22:42,440 --> 00:22:45,770 when we set your marginal rate of substitution, 538 00:22:45,770 --> 00:22:55,221 which, remember, we defined as minus MUc over MUp, equal-- 539 00:22:55,221 --> 00:22:57,630 I'm going to get rid of this-- 540 00:22:57,630 --> 00:23:03,390 equal to your marginal rate of transformation, 541 00:23:03,390 --> 00:23:07,620 which we defined as minus pc over pp. 542 00:23:07,620 --> 00:23:13,280 And this is the fundamental equation of consumer choice. 543 00:23:13,280 --> 00:23:14,780 If you understand this equation, you 544 00:23:14,780 --> 00:23:16,490 can solve virtually every consumer choice 545 00:23:16,490 --> 00:23:19,410 problem I'll give you, OK? 546 00:23:19,410 --> 00:23:23,820 That basically, at the optimum, the ratio of marginal utilities 547 00:23:23,820 --> 00:23:26,100 equals the ratio prices. 548 00:23:26,100 --> 00:23:30,060 That is the rate at which you want to trade off pizza 549 00:23:30,060 --> 00:23:32,730 for cookies is the rate at which the market will 550 00:23:32,730 --> 00:23:37,570 allow you to trade off pizza for cookies, OK? 551 00:23:37,570 --> 00:23:41,770 Basically, it's saying the ratio of the benefits. 552 00:23:41,770 --> 00:23:44,500 Think of this as the benefits and this as the costs. 553 00:23:44,500 --> 00:23:46,928 Think of the MRS as the benefits. 554 00:23:46,928 --> 00:23:47,720 It's what you want. 555 00:23:47,720 --> 00:23:48,820 MRT is the costs. 556 00:23:48,820 --> 00:23:50,170 It's where you're constrained. 557 00:23:50,170 --> 00:23:52,240 You want to set the ratio of the benefits 558 00:23:52,240 --> 00:23:55,840 equal to the ratio of the costs, OK? 559 00:23:55,840 --> 00:23:58,660 Now I find it actually easier to think of it this way. 560 00:23:58,660 --> 00:24:04,300 If you just rearrange terms, you can write it as MUc over pc 561 00:24:04,300 --> 00:24:07,656 equals MUp over p sub p. 562 00:24:07,656 --> 00:24:10,810 I like this way of writing it because I call this 563 00:24:10,810 --> 00:24:13,040 the bang for the buck equation. 564 00:24:13,040 --> 00:24:17,140 What this is saying, your marginal happiness per dollar 565 00:24:17,140 --> 00:24:19,860 should be equal. 566 00:24:19,860 --> 00:24:24,210 This is sort of the happiness per dollar spent on cookies. 567 00:24:24,210 --> 00:24:27,740 This is the happiness per dollar spent on pizza. 568 00:24:27,740 --> 00:24:29,050 And you want those to be equal. 569 00:24:29,050 --> 00:24:30,550 You want the bang for the-- you want 570 00:24:30,550 --> 00:24:32,380 to put your next dollar where it's 571 00:24:32,380 --> 00:24:37,040 going to make you happiest, OK? 572 00:24:37,040 --> 00:24:41,020 And so, basically, think of that as your bang for your buck. 573 00:24:41,020 --> 00:24:44,370 So, for example, suppose you were in a position 574 00:24:44,370 --> 00:24:47,350 where the MRS was greater than the MRT. 575 00:24:47,350 --> 00:24:50,393 You're in a position where the marginal utility of cookies-- 576 00:24:50,393 --> 00:24:51,810 and I'm getting rid the negatives. 577 00:24:51,810 --> 00:24:52,830 There's negative on both sides. 578 00:24:52,830 --> 00:24:54,580 So I'm just going to get rid of the negatives, OK? 579 00:24:54,580 --> 00:24:56,955 The marginal utility of cookies over the marginal utility 580 00:24:56,955 --> 00:25:02,280 of pizza was greater than the price of cookies 581 00:25:02,280 --> 00:25:06,280 over the price of pizza, OK? 582 00:25:06,280 --> 00:25:09,640 That is the slope of the indifference curve 583 00:25:09,640 --> 00:25:12,230 was greater than the slope of the budget constraint. 584 00:25:12,230 --> 00:25:14,310 This is the slope of the indifference curve. 585 00:25:14,310 --> 00:25:15,280 OK, this is slope of the indifference curve. 586 00:25:15,280 --> 00:25:17,290 This is the slope of the budget constraint. 587 00:25:17,290 --> 00:25:20,045 In absolute value, the slope of the indifference curve 588 00:25:20,045 --> 00:25:22,420 is greater in absolute value than the slope of the budget 589 00:25:22,420 --> 00:25:24,780 constraint, OK? 590 00:25:24,780 --> 00:25:28,500 That would be true at points like point A, point A where 591 00:25:28,500 --> 00:25:30,180 you intersect-- 592 00:25:30,180 --> 00:25:34,780 where you basically intersect from above the budget 593 00:25:34,780 --> 00:25:36,510 constraint by the indifference curve. 594 00:25:36,510 --> 00:25:40,530 So a point like point A has a steeper slope 595 00:25:40,530 --> 00:25:43,660 of the indifference curve than does the budget constraint. 596 00:25:43,660 --> 00:25:46,330 What that says is intuitively-- and, once again, 597 00:25:46,330 --> 00:25:48,280 I want you to understand the intuition-- 598 00:25:48,280 --> 00:25:52,120 the rate at which you are willing to give up, 599 00:25:52,120 --> 00:25:54,670 the rate at which you are willing to give up 600 00:25:54,670 --> 00:25:57,820 cookies for pizzas-- 601 00:25:57,820 --> 00:25:58,660 I'm sorry. 602 00:25:58,660 --> 00:25:59,485 Let me say it-- 603 00:25:59,485 --> 00:26:00,610 let me say it a better way. 604 00:26:00,610 --> 00:26:05,120 The marginal benefit to you of another cookie 605 00:26:05,120 --> 00:26:08,910 relative to another pizza is higher 606 00:26:08,910 --> 00:26:12,660 than what the market will charge you to turn pizza into cookies. 607 00:26:12,660 --> 00:26:13,560 Let me say it again. 608 00:26:13,560 --> 00:26:17,373 The marginal benefit to you of another cookie, which is this-- 609 00:26:17,373 --> 00:26:19,290 this is how much more you want the next cookie 610 00:26:19,290 --> 00:26:21,570 relative to how much more you want the next pizza-- 611 00:26:21,570 --> 00:26:22,987 is greater than what the market is 612 00:26:22,987 --> 00:26:27,300 going to charge you to trade in your pizza for cookies. 613 00:26:27,300 --> 00:26:31,415 Therefore, you should trade in your pizza for cookies, OK? 614 00:26:31,415 --> 00:26:32,790 So let's say this mathematically. 615 00:26:32,790 --> 00:26:38,010 At a point like A, point A, OK, you 616 00:26:38,010 --> 00:26:42,330 have your marginal utility for pizza 617 00:26:42,330 --> 00:26:45,180 is the derivative of the utility function with respect 618 00:26:45,180 --> 00:26:46,690 to the number of slices of pizza. 619 00:26:46,690 --> 00:26:47,600 It's the marginal utility. 620 00:26:47,600 --> 00:26:49,267 It's derivative of the utility function. 621 00:26:49,267 --> 00:26:59,490 So it's dU dp, which is equal to 0.5 times C over square root 622 00:26:59,490 --> 00:27:04,330 of P times C, OK? 623 00:27:04,330 --> 00:27:09,550 And, at point A, at point A, we had 624 00:27:09,550 --> 00:27:11,200 two cookies and five pizzas. 625 00:27:11,200 --> 00:27:13,120 At point A, P was five. 626 00:27:13,120 --> 00:27:14,370 C was two. 627 00:27:14,370 --> 00:27:16,600 OK, that's true of point A. 628 00:27:16,600 --> 00:27:18,685 So we can evaluate the marginal utility dU 629 00:27:18,685 --> 00:27:22,595 dp, which equals 0.5 times C over square root of P times C. 630 00:27:22,595 --> 00:27:24,220 So that's 1 over the square root of 10. 631 00:27:28,070 --> 00:27:30,895 That's the marginal utility of the next slice of pizza. 632 00:27:30,895 --> 00:27:32,270 The next slice of pizza makes you 633 00:27:32,270 --> 00:27:33,590 1 over square root of 10 happy. 634 00:27:33,590 --> 00:27:35,215 Once again, that number is meaningless. 635 00:27:35,215 --> 00:27:36,690 So we only care about it in ratios. 636 00:27:36,690 --> 00:27:37,790 So we need the ratio. 637 00:27:37,790 --> 00:27:41,060 So let's do the marginal utility of cookies. 638 00:27:41,060 --> 00:27:48,890 That's dU dC, which is 0.5 times P 639 00:27:48,890 --> 00:27:54,650 over square root of P times C, which is 2.5 640 00:27:54,650 --> 00:28:00,870 over the square root of 10, OK? 641 00:28:00,870 --> 00:28:04,290 So the marginal utility of pizza is 1 over square root of 10. 642 00:28:04,290 --> 00:28:07,330 Marginal utility of cookies is 2.5 over the square root of 10. 643 00:28:07,330 --> 00:28:14,410 Therefore, your marginal rate of substitution is minus 2.5. 644 00:28:14,410 --> 00:28:18,110 Remember, marginal rate of substitution is MUc over MUp. 645 00:28:18,110 --> 00:28:20,430 So your marginal rate of substitution is minus 2.5. 646 00:28:20,430 --> 00:28:22,292 What does that mean? 647 00:28:22,292 --> 00:28:23,750 Can anyone tell me what that means? 648 00:28:23,750 --> 00:28:25,500 Your marginal rate of substitution is 2.5. 649 00:28:25,500 --> 00:28:26,333 What does that mean? 650 00:28:26,333 --> 00:28:27,560 That is a meaningful concept. 651 00:28:27,560 --> 00:28:28,700 Utils are not, but that is. 652 00:28:28,700 --> 00:28:30,630 Yeah, say it loudly so we can hear. 653 00:28:30,630 --> 00:28:33,825 AUDIENCE: You're willing to trade-- 654 00:28:33,825 --> 00:28:35,962 you're willing to trade two pizzas for one cookie. 655 00:28:35,962 --> 00:28:37,670 JONATHAN GRUBER: You're willing to trade. 656 00:28:37,670 --> 00:28:40,790 Exactly, you're willing to give up 2.5 slices of pizza 657 00:28:40,790 --> 00:28:42,900 for one cookie. 658 00:28:42,900 --> 00:28:44,310 That's what that number means. 659 00:28:44,310 --> 00:28:45,420 And that is a meaningful number. 660 00:28:45,420 --> 00:28:46,020 That's not an ordinal. 661 00:28:46,020 --> 00:28:46,687 That's cardinal. 662 00:28:46,687 --> 00:28:47,590 We can use that. 663 00:28:47,590 --> 00:28:51,030 You are willing to give up 2.5 slices of pizza 664 00:28:51,030 --> 00:28:52,260 to get one cookie. 665 00:28:52,260 --> 00:28:55,870 What is the market asking you to give up? 666 00:28:55,870 --> 00:29:00,270 How much pizza do you have to give up to get one cookie? 667 00:29:00,270 --> 00:29:02,160 Half a slice. 668 00:29:02,160 --> 00:29:05,353 You are happy to give up 2 and 1/2 slices of pizza 669 00:29:05,353 --> 00:29:06,770 to get a cookie, but the market is 670 00:29:06,770 --> 00:29:08,010 saying we'll let you have a cookie for half 671 00:29:08,010 --> 00:29:09,160 a slice of pizza. 672 00:29:09,160 --> 00:29:10,440 So what should you do? 673 00:29:10,440 --> 00:29:11,380 AUDIENCE: Trade. 674 00:29:11,380 --> 00:29:12,713 JONATHAN GRUBER: Eat less pizza. 675 00:29:12,713 --> 00:29:13,780 Eat more cookies. 676 00:29:13,780 --> 00:29:15,890 That will unambiguously make you happier. 677 00:29:15,890 --> 00:29:21,320 And that's why you should move from point A towards point D. 678 00:29:21,320 --> 00:29:24,640 OK, that's the intuition, OK? 679 00:29:24,640 --> 00:29:27,940 You basically want to trade pizza for cookies 680 00:29:27,940 --> 00:29:31,210 until these things are equal. 681 00:29:31,210 --> 00:29:35,050 Indeed, I'd like you to go home and do the same math starting 682 00:29:35,050 --> 00:29:38,810 at point B. If you do the same math starting at point B, 683 00:29:38,810 --> 00:29:43,280 you'll find the MRS is much below 1/2. 684 00:29:46,130 --> 00:29:48,410 That is, at that point, you are happy to give up 685 00:29:48,410 --> 00:29:51,290 tons of cookies to get pizza because, jeez, you've got 10 686 00:29:51,290 --> 00:29:52,750 cookies and one slice of pizza. 687 00:29:52,750 --> 00:29:54,542 You'd give up tons of cookies to get pizza. 688 00:29:54,542 --> 00:29:56,375 But the market says you only have to give up 689 00:29:56,375 --> 00:29:57,590 two cookies to get pizza. 690 00:29:57,590 --> 00:30:01,770 So you'll happily do it, and you move back towards point D. 691 00:30:01,770 --> 00:30:04,890 And that's sort of in a bundle sort of the intuition and math 692 00:30:04,890 --> 00:30:08,160 and graphics of how we do constrained optimization. 693 00:30:08,160 --> 00:30:09,900 OK, that is hard and very important. 694 00:30:09,900 --> 00:30:11,440 Questions about that? 695 00:30:11,440 --> 00:30:14,240 Don't hesitate to ask. 696 00:30:14,240 --> 00:30:16,150 OK, that is hard and very important. 697 00:30:16,150 --> 00:30:18,880 If you understand this, you're sort of 698 00:30:18,880 --> 00:30:20,680 done with consumer theory, OK? 699 00:30:20,680 --> 00:30:23,530 This is sort of the core of what consumer theory is all about. 700 00:30:23,530 --> 00:30:26,110 It's all about this balancing act. 701 00:30:26,110 --> 00:30:29,220 The whole course is fundamentally 702 00:30:29,220 --> 00:30:32,010 all about one equation, which is marginal benefits 703 00:30:32,010 --> 00:30:34,810 equals marginal costs, OK? 704 00:30:34,810 --> 00:30:37,750 Everything we do is going to be about weighing 705 00:30:37,750 --> 00:30:39,280 the marginal benefit of an activity 706 00:30:39,280 --> 00:30:42,360 against its marginal costs. 707 00:30:42,360 --> 00:30:44,740 If we take the next step, what's the benefit? 708 00:30:44,740 --> 00:30:45,818 And what's the cost? 709 00:30:45,818 --> 00:30:47,610 Well, here the marginal benefit is the MRS. 710 00:30:47,610 --> 00:30:49,260 The marginal cost is the MRT. 711 00:30:49,260 --> 00:30:51,100 We want to set them equal. 712 00:30:51,100 --> 00:30:55,940 And this sort of example I hope explained why, OK? 713 00:30:55,940 --> 00:30:58,760 So that is how we think about constrained choice. 714 00:30:58,760 --> 00:31:00,540 Now I want apply it. 715 00:31:00,540 --> 00:31:05,240 I want to apply it by looking at the example of food stamps, OK? 716 00:31:05,240 --> 00:31:08,052 Now food stamps are not actually called food stamps anymore. 717 00:31:08,052 --> 00:31:10,010 When I was a kid, they were called food stamps. 718 00:31:10,010 --> 00:31:12,560 It's basically a program the government has 719 00:31:12,560 --> 00:31:14,900 that provides money for individuals 720 00:31:14,900 --> 00:31:16,640 to buy food if they're low income. 721 00:31:16,640 --> 00:31:20,330 Essentially, we have in the US what's called the poverty line. 722 00:31:23,450 --> 00:31:25,950 And I'll talk a lot more about this at the end of the class, 723 00:31:25,950 --> 00:31:27,408 but the poverty line is essentially 724 00:31:27,408 --> 00:31:29,910 a measure of what's a minimum level of resources 725 00:31:29,910 --> 00:31:31,560 you need to live in America. 726 00:31:31,560 --> 00:31:35,350 The poverty line for an individual is about $14,000. 727 00:31:35,350 --> 00:31:37,783 OK, for a family of four, it's about $28,000. 728 00:31:37,783 --> 00:31:39,450 How you feel about that number obviously 729 00:31:39,450 --> 00:31:40,440 is going depend on where you're from. 730 00:31:40,440 --> 00:31:42,180 If you're from Boston, you'll say that's insane. 731 00:31:42,180 --> 00:31:43,470 If you're from some rural part of the country, 732 00:31:43,470 --> 00:31:45,630 you think, yeah, that's poor, but manageable. 733 00:31:45,630 --> 00:31:48,042 OK, we'll talk later about the poverty line, 734 00:31:48,042 --> 00:31:49,250 what's good and bad about it. 735 00:31:49,250 --> 00:31:50,970 But, in any case, if you're below the poverty line 736 00:31:50,970 --> 00:31:53,790 in America, roughly speaking, you get help with buying food. 737 00:31:53,790 --> 00:31:56,265 And that comes through a program we now call SNAP. 738 00:31:56,265 --> 00:31:57,640 It used to be called food stamps. 739 00:31:57,640 --> 00:32:00,480 I've got to update my notes. 740 00:32:00,480 --> 00:32:03,720 Supplemental Nutrition-- I don't know. 741 00:32:03,720 --> 00:32:06,230 I know the N is for nutrition. 742 00:32:06,230 --> 00:32:09,810 OK, so, basically, what the SNAP program does 743 00:32:09,810 --> 00:32:11,400 is it gives you a debit card. 744 00:32:11,400 --> 00:32:14,490 If you qualify on income grounds, you get a debit card, 745 00:32:14,490 --> 00:32:18,278 and that debit card can be used to buy food and food only, OK? 746 00:32:18,278 --> 00:32:20,570 So you essentially get a debit card from the government 747 00:32:20,570 --> 00:32:24,730 that you can use to buy food if you're poor enough. 748 00:32:24,730 --> 00:32:27,430 And they give you sort of a fixed amount every month, 749 00:32:27,430 --> 00:32:30,560 and that amount can be used to purchase food. 750 00:32:30,560 --> 00:32:32,040 So here's the question. 751 00:32:32,040 --> 00:32:33,740 Why go through this rigmarole? 752 00:32:33,740 --> 00:32:35,678 Why not just give people cash? 753 00:32:35,678 --> 00:32:37,970 This fancy thing, if we want to give poor people money, 754 00:32:37,970 --> 00:32:39,620 why don't you just give them money? 755 00:32:39,620 --> 00:32:40,453 And we're going to-- 756 00:32:40,453 --> 00:32:42,112 I don't want the answer yet, OK? 757 00:32:42,112 --> 00:32:43,820 What I want to do is show you graphically 758 00:32:43,820 --> 00:32:45,110 how we think about the trade-off, 759 00:32:45,110 --> 00:32:46,590 and then we'll come to the answer. 760 00:32:46,590 --> 00:32:48,270 So hold your thoughts. 761 00:32:48,270 --> 00:32:51,940 So let's actually graph how we think about food stamps. 762 00:32:51,940 --> 00:32:54,070 Let's go to figure 3-5A. 763 00:32:54,070 --> 00:32:57,040 And let's start with a cash transfer. 764 00:32:57,040 --> 00:32:58,780 So here's the setup. 765 00:32:58,780 --> 00:33:02,490 Imagine people start with an income of $5,000. 766 00:33:02,490 --> 00:33:03,990 That's super poor, OK? 767 00:33:03,990 --> 00:33:08,080 $5,000 is their whole family income for the year, OK? 768 00:33:08,080 --> 00:33:11,338 And let's say all they can spend it on is food or shelter. 769 00:33:11,338 --> 00:33:13,380 Remember, as this gentleman pointed out, in life, 770 00:33:13,380 --> 00:33:15,310 there's more than two goods, but it makes it a lot easier 771 00:33:15,310 --> 00:33:16,265 to have two goods. 772 00:33:16,265 --> 00:33:17,140 So imagine this case. 773 00:33:17,140 --> 00:33:18,880 Your two goods are food and shelter. 774 00:33:18,880 --> 00:33:20,260 And, actually, quite frankly, if you're that poor, 775 00:33:20,260 --> 00:33:21,718 that probably is the only two goods 776 00:33:21,718 --> 00:33:24,390 you have to-- you can worry about at that level of income. 777 00:33:24,390 --> 00:33:25,700 OK, it's food and shelter. 778 00:33:25,700 --> 00:33:28,010 So you $5,000 to devote to food and shelter. 779 00:33:28,010 --> 00:33:31,000 So you have some original budget line, 780 00:33:31,000 --> 00:33:33,670 which is labeled there original budget 781 00:33:33,670 --> 00:33:36,700 line, that runs from 5,000 in food to 5,000 in shelter. 782 00:33:36,700 --> 00:33:40,500 And then you can have some of in between, some along the way, 783 00:33:40,500 --> 00:33:41,110 OK? 784 00:33:41,110 --> 00:33:44,360 Now let's say we give someone $500 in cash. 785 00:33:44,360 --> 00:33:46,780 Obviously, this graph is not to scale, OK? 786 00:33:46,780 --> 00:33:49,387 It looks like you're doubling his income, but it's only $500. 787 00:33:49,387 --> 00:33:51,720 This just sort of makes it easier, a not to scale graph. 788 00:33:51,720 --> 00:33:55,330 Let's say we give someone-- we say to them, look, you're poor. 789 00:33:55,330 --> 00:33:57,950 We're going to give you $500 in cash. 790 00:33:57,950 --> 00:34:00,130 Well, now all we've done is shift out your budget 791 00:34:00,130 --> 00:34:03,007 constraint from 5,000 to 5,500. 792 00:34:03,007 --> 00:34:04,840 OK, we've shifted out your budget constraint 793 00:34:04,840 --> 00:34:07,570 from 5,000 to 5,500. 794 00:34:07,570 --> 00:34:09,460 What does that do to your choices? 795 00:34:09,460 --> 00:34:12,380 Well, consider two different types of people. 796 00:34:12,380 --> 00:34:17,840 Person y, OK, they used to be on indifference curve I0. 797 00:34:17,840 --> 00:34:20,447 They used to spend almost all their income on food 798 00:34:20,447 --> 00:34:21,489 and not a lot on shelter. 799 00:34:21,489 --> 00:34:23,659 They were probably homeless, OK? 800 00:34:23,659 --> 00:34:25,460 So they spent all their money on food 801 00:34:25,460 --> 00:34:27,080 and were basically homeless. 802 00:34:27,080 --> 00:34:28,112 Now what do they do? 803 00:34:28,112 --> 00:34:30,320 Well, they spend a little more on food and a lot more 804 00:34:30,320 --> 00:34:31,342 on shelter. 805 00:34:31,342 --> 00:34:33,050 Maybe now they get-- you know, $400 still 806 00:34:33,050 --> 00:34:34,258 doesn't buy you much shelter. 807 00:34:34,258 --> 00:34:36,469 They spend a little more, OK? 808 00:34:36,469 --> 00:34:39,620 Maybe, a night a week, they can get shelter, OK? 809 00:34:39,620 --> 00:34:41,719 So, basically, that's what they do. 810 00:34:41,719 --> 00:34:44,197 That's their constrained optimization. 811 00:34:44,197 --> 00:34:45,739 We're not saying it's right or wrong. 812 00:34:45,739 --> 00:34:47,072 This is not normative economics. 813 00:34:47,072 --> 00:34:48,350 It's positive. 814 00:34:48,350 --> 00:34:50,750 The positive thing is, given their utility function, 815 00:34:50,750 --> 00:34:54,010 they move from point y1 to y2. 816 00:34:54,010 --> 00:34:55,600 Now imagine someone like individual x. 817 00:34:55,600 --> 00:34:56,620 They're different. 818 00:34:56,620 --> 00:34:58,703 Their tastes are such that they don't need to eat. 819 00:34:58,703 --> 00:35:00,480 They just want to have shelter. 820 00:35:00,480 --> 00:35:03,660 So they're up at point x1 initially. 821 00:35:03,660 --> 00:35:05,610 And you give them that $500, and they 822 00:35:05,610 --> 00:35:07,680 spend just a little bit more of it on food and even more of it 823 00:35:07,680 --> 00:35:08,280 on shelter. 824 00:35:08,280 --> 00:35:10,470 They just love their shelter, OK? 825 00:35:10,470 --> 00:35:11,530 And they're just super-- 826 00:35:11,530 --> 00:35:12,780 they're super Weight Watchers. 827 00:35:12,780 --> 00:35:14,430 They don't eat, OK? 828 00:35:14,430 --> 00:35:16,800 So, basically, they move from x1 to x2. 829 00:35:16,800 --> 00:35:19,780 Once again, not normative right or wrong, 830 00:35:19,780 --> 00:35:22,230 it's just these are feasible choices people 831 00:35:22,230 --> 00:35:25,910 could make given the opportunity set with which they're faced. 832 00:35:25,910 --> 00:35:28,410 And that's what happens when you give them the $500 in cash. 833 00:35:28,410 --> 00:35:30,960 Questions about what I did here on this graph alone? 834 00:35:30,960 --> 00:35:31,585 Yeah? 835 00:35:31,585 --> 00:35:33,340 AUDIENCE: Like, even if like you gave them 836 00:35:33,340 --> 00:35:35,330 money specifically for food, couldn't they then 837 00:35:35,330 --> 00:35:37,312 just reallocate their other money? 838 00:35:37,312 --> 00:35:39,020 JONATHAN GRUBER: OK, that's a good point. 839 00:35:39,020 --> 00:35:39,610 We'll come back to that. 840 00:35:39,610 --> 00:35:41,402 That's time out if you're not a sports fan. 841 00:35:41,402 --> 00:35:45,010 OK, so we will come back to that. 842 00:35:45,010 --> 00:35:46,480 And, in fact-- 843 00:35:46,480 --> 00:35:48,470 OK, but do people understand what the cash 844 00:35:48,470 --> 00:35:50,610 transfer is, how it works? 845 00:35:50,610 --> 00:35:53,030 OK, now let's go to SNAP. 846 00:35:53,030 --> 00:35:56,040 And let's say, with SNAP, instead of giving them $500, 847 00:35:56,040 --> 00:35:57,640 we'll give them the debit card. 848 00:35:57,640 --> 00:35:59,610 Instead of handing them a $500 check, 849 00:35:59,610 --> 00:36:01,470 we give them a debit card with $500 on it 850 00:36:01,470 --> 00:36:03,390 that can only be used on food. 851 00:36:03,390 --> 00:36:05,280 How does this affect their budget constraint? 852 00:36:05,280 --> 00:36:06,720 Now we see where budget constraints start 853 00:36:06,720 --> 00:36:08,910 to get interesting and fun and the kind of challenges 854 00:36:08,910 --> 00:36:11,118 you're going to face in this course in drawing budget 855 00:36:11,118 --> 00:36:11,983 constraints. 856 00:36:11,983 --> 00:36:13,650 The original budget constraint continues 857 00:36:13,650 --> 00:36:17,940 to be the original budget line running from 5,000 to 5,000. 858 00:36:17,940 --> 00:36:20,850 The new budget constraint is this kinked line 859 00:36:20,850 --> 00:36:25,230 that runs from 5,000 on the y-axis to the point 860 00:36:25,230 --> 00:36:29,680 x2 at 5,000 on the y-axis. 861 00:36:29,680 --> 00:36:32,770 So it starts at 5,000 on the y-axis, 0 on the x-axis. 862 00:36:32,770 --> 00:36:35,900 There's a flat line that goes to 5,000 on the y-axis, 500 863 00:36:35,900 --> 00:36:37,048 on the x-axis. 864 00:36:37,048 --> 00:36:39,340 And then it slopes down parallel to the original budget 865 00:36:39,340 --> 00:36:41,830 constraint to 5,500. 866 00:36:41,830 --> 00:36:44,410 Can someone explain to me why that's the new budget 867 00:36:44,410 --> 00:36:45,210 constraint? 868 00:36:45,210 --> 00:36:45,710 Yeah? 869 00:36:45,710 --> 00:36:48,085 AUDIENCE: You can't spend a negative amount. 870 00:36:48,085 --> 00:36:50,697 So you can't spend like negative amounts 871 00:36:50,697 --> 00:36:52,400 of your non-food-stamp money on food. 872 00:36:52,400 --> 00:36:53,900 JONATHAN GRUBER: Exactly, you have-- 873 00:36:53,900 --> 00:36:57,247 we are forcing you to spend at least $500. 874 00:36:57,247 --> 00:36:59,830 Compared to cash, where you can do whatever the hell you want, 875 00:36:59,830 --> 00:37:05,330 we are forcing you to spend $500 of your money on food. 876 00:37:05,330 --> 00:37:06,848 Coming to the question back there, 877 00:37:06,848 --> 00:37:08,890 it doesn't have to be a specifically labeled 500. 878 00:37:08,890 --> 00:37:10,390 It can be any 500. 879 00:37:10,390 --> 00:37:13,950 But we're forcing you to spend at least $500 on food. 880 00:37:13,950 --> 00:37:17,330 Well, what does that do to your choices? 881 00:37:17,330 --> 00:37:21,550 Well, for person y, it makes no difference 882 00:37:21,550 --> 00:37:24,887 whether they get cash or whether they get food stamps. 883 00:37:24,887 --> 00:37:26,970 Now the person, light blue shirt, turquoise shirt, 884 00:37:26,970 --> 00:37:27,803 asked that question. 885 00:37:27,803 --> 00:37:29,780 Why does it make no difference? 886 00:37:29,780 --> 00:37:30,340 Yeah? 887 00:37:30,340 --> 00:37:31,903 Why does it-- whatever, greenish, I 888 00:37:31,903 --> 00:37:32,820 don't know, yeah, you. 889 00:37:32,820 --> 00:37:34,793 Why does it make no difference for person y 890 00:37:34,793 --> 00:37:36,210 if I give him food stamps or cash? 891 00:37:36,210 --> 00:37:38,230 AUDIENCE: He's already spending a lot of his money on food. 892 00:37:38,230 --> 00:37:40,522 So any money he gets he can just reallocate differently 893 00:37:40,522 --> 00:37:42,162 so he can spend some of the money 894 00:37:42,162 --> 00:37:43,780 he would have used on food on shelter. 895 00:37:43,780 --> 00:37:47,265 JONATHAN GRUBER: Exactly, he can just reallocate his money, OK? 896 00:37:47,265 --> 00:37:48,140 That's exactly right. 897 00:37:48,140 --> 00:37:50,980 So, for person y, there's no difference. 898 00:37:50,980 --> 00:37:54,378 Look, they're already spending, what, $4,900 on food. 899 00:37:54,378 --> 00:37:56,170 You give him a thing labeled $500 for food. 900 00:37:56,170 --> 00:37:57,670 It's not going to affect their life. 901 00:37:57,670 --> 00:37:58,870 They'll just take 500. 902 00:37:58,870 --> 00:38:01,270 They'll just spend-- they'll just treat it as $500 more 903 00:38:01,270 --> 00:38:02,010 in cash. 904 00:38:02,010 --> 00:38:02,980 They're indifferent. 905 00:38:02,980 --> 00:38:04,460 So nothing affects them. 906 00:38:04,460 --> 00:38:07,920 But what about person x? 907 00:38:07,920 --> 00:38:11,470 Well, person x, remember, the dashed portion 908 00:38:11,470 --> 00:38:14,740 of this budget constraint is from the old cash example. 909 00:38:14,740 --> 00:38:16,250 And the dotted indifference curve 910 00:38:16,250 --> 00:38:18,190 is what they would have chosen with cash. 911 00:38:18,190 --> 00:38:20,680 Remember, person x with cash would 912 00:38:20,680 --> 00:38:24,640 have chosen to still spend less than $500 on food. 913 00:38:24,640 --> 00:38:26,860 Even when you gave them $500, they still 914 00:38:26,860 --> 00:38:29,680 only spent $300 on food. 915 00:38:29,680 --> 00:38:33,270 So we are forcing them to not be on their preferred budget 916 00:38:33,270 --> 00:38:34,740 constraint. 917 00:38:34,740 --> 00:38:40,420 Rather, we're forcing them down to point x2, 918 00:38:40,420 --> 00:38:43,420 which is they'll spend the minimum they can on food, 919 00:38:43,420 --> 00:38:47,670 but the minimum is $500, OK? 920 00:38:47,670 --> 00:38:50,470 We are forcing them down to point x2. 921 00:38:50,470 --> 00:38:52,420 Now why do I say forcing them? 922 00:38:52,420 --> 00:38:55,600 Why do I know for sure they are being forced, that they're 923 00:38:55,600 --> 00:38:59,260 less happy at x2 than they would have been when they gave them 924 00:38:59,260 --> 00:38:59,763 the cash? 925 00:38:59,763 --> 00:39:00,930 How do I know that for sure? 926 00:39:00,930 --> 00:39:01,930 Yeah? 927 00:39:01,930 --> 00:39:03,930 AUDIENCE: They're at a lower indifference curve. 928 00:39:03,930 --> 00:39:05,170 JONATHAN GRUBER: Exactly. 929 00:39:05,170 --> 00:39:06,295 Think of it this way. 930 00:39:06,295 --> 00:39:08,170 The fundamental-- one of the important things 931 00:39:08,170 --> 00:39:09,850 is people always get to the point that 932 00:39:09,850 --> 00:39:11,798 makes them happiest, OK? 933 00:39:11,798 --> 00:39:13,840 We call it the robustness of economic equilibria. 934 00:39:13,840 --> 00:39:15,882 People get to the point that makes them happiest. 935 00:39:15,882 --> 00:39:19,050 They want-- they always before had 936 00:39:19,050 --> 00:39:22,175 the choice of spending $500 on food, and they chose not to. 937 00:39:22,175 --> 00:39:24,300 Therefore, if you force them to spend $500 on food, 938 00:39:24,300 --> 00:39:26,915 they must be less happy, OK? 939 00:39:26,915 --> 00:39:27,790 Think of it that way. 940 00:39:27,790 --> 00:39:29,680 They always could have spent $500 on food. 941 00:39:29,680 --> 00:39:30,460 They didn't. 942 00:39:30,460 --> 00:39:31,877 Therefore, in forcing them, you're 943 00:39:31,877 --> 00:39:34,220 making them less happy, OK? 944 00:39:34,220 --> 00:39:38,150 So they are worse off, OK? 945 00:39:38,150 --> 00:39:39,500 They are forced to spend. 946 00:39:39,500 --> 00:39:41,090 They'd rather spend some of that money 947 00:39:41,090 --> 00:39:43,970 and find a nicer place to live, but we're not letting them. 948 00:39:43,970 --> 00:39:47,300 We're making them buy food, OK? 949 00:39:47,300 --> 00:39:48,870 Do people-- I don't want-- 950 00:39:48,870 --> 00:39:52,200 I just want to know if people understand the graphics here 951 00:39:52,200 --> 00:39:53,870 and the conclusions I drew. 952 00:39:53,870 --> 00:39:56,770 OK, now why? 953 00:39:56,770 --> 00:39:58,130 Why are we doing this? 954 00:39:58,130 --> 00:40:00,610 Why would you-- they're better off with cash. 955 00:40:00,610 --> 00:40:02,860 Why would we force them to have food? 956 00:40:02,860 --> 00:40:04,760 Yeah? 957 00:40:04,760 --> 00:40:06,660 AUDIENCE: Say because what makes-- 958 00:40:06,660 --> 00:40:08,550 what puts people on the highest indifference 959 00:40:08,550 --> 00:40:10,660 is just what makes them happiest, but not necessarily 960 00:40:10,660 --> 00:40:12,202 what makes them like live the longest 961 00:40:12,202 --> 00:40:14,050 or like have the best health So, perhaps, 962 00:40:14,050 --> 00:40:16,800 like if you never spend money on food, and then you die, 963 00:40:16,800 --> 00:40:17,998 that would be really bad. 964 00:40:17,998 --> 00:40:20,290 JONATHAN GRUBER: OK, but, basically, what you're saying 965 00:40:20,290 --> 00:40:22,940 is you know better than the guy. 966 00:40:22,940 --> 00:40:24,190 Let me-- I'm not accusing you. 967 00:40:24,190 --> 00:40:28,320 I'm just saying, look, if people knew best, 968 00:40:28,320 --> 00:40:33,420 maybe they'd like to just like have a nice house and die, OK? 969 00:40:33,420 --> 00:40:35,820 If people knew best, then there'd 970 00:40:35,820 --> 00:40:38,080 be no reason to do this. 971 00:40:38,080 --> 00:40:41,210 The reason to do this is because we think they don't know best. 972 00:40:41,210 --> 00:40:44,110 So, for example, let's change the label on the y-axis, just 973 00:40:44,110 --> 00:40:44,750 a small change. 974 00:40:44,750 --> 00:40:47,091 Let's cross out shelter and write cocaine. 975 00:40:47,091 --> 00:40:49,860 [LAUGHTER] 976 00:40:49,860 --> 00:40:50,850 OK? 977 00:40:50,850 --> 00:40:53,640 Well, in that case, maybe we don't feel so bad 978 00:40:53,640 --> 00:40:57,590 about forcing the guy to buy food instead of cocaine, OK? 979 00:40:57,590 --> 00:41:00,290 In other words, this a program which might make 980 00:41:00,290 --> 00:41:03,380 sense if we are paternalistic. 981 00:41:03,380 --> 00:41:07,010 Now we're getting into normative economics, paternalistic. 982 00:41:07,010 --> 00:41:09,110 If we think that people won't necessarily 983 00:41:09,110 --> 00:41:12,350 make the right decisions for themselves, 984 00:41:12,350 --> 00:41:14,600 then it may be worth actually making them 985 00:41:14,600 --> 00:41:17,100 worse off because they're not worse off. 986 00:41:17,100 --> 00:41:19,370 Their perceived benefits are worse, 987 00:41:19,370 --> 00:41:23,070 but they don't know what they're doing, OK? 988 00:41:23,070 --> 00:41:25,643 Now you can see why-- 989 00:41:25,643 --> 00:41:27,060 I hope you can sort of immediately 990 00:41:27,060 --> 00:41:31,230 see why this concept makes economists a little nervous 991 00:41:31,230 --> 00:41:34,213 because why do we know what they want better than they do, OK? 992 00:41:34,213 --> 00:41:35,880 So it makes people a little bit nervous, 993 00:41:35,880 --> 00:41:37,630 economists a little bit nervous, and a lot 994 00:41:37,630 --> 00:41:40,320 of people a little bit nervous to say, gee, maybe they're 995 00:41:40,320 --> 00:41:42,254 just happier doing cocaine. 996 00:41:42,254 --> 00:41:44,462 And how do we know that that's the wrong way for them 997 00:41:44,462 --> 00:41:45,504 to spend their resources? 998 00:41:45,504 --> 00:41:46,025 Yeah? 999 00:41:46,025 --> 00:41:46,873 AUDIENCE: Well, like can't you look 1000 00:41:46,873 --> 00:41:49,330 at it from the perspective of like this is taxpayer money, 1001 00:41:49,330 --> 00:41:49,830 right? 1002 00:41:49,830 --> 00:41:51,562 So then aren't you also just factoring 1003 00:41:51,562 --> 00:41:54,320 in how the taxpayer wants to spend their money and then 1004 00:41:54,320 --> 00:41:56,760 their indifference curve and all their information? 1005 00:41:56,760 --> 00:41:57,740 JONATHAN GRUBER: That's a very good point. 1006 00:41:57,740 --> 00:41:59,448 Now but there's sort of two points there. 1007 00:41:59,448 --> 00:42:04,650 First of all, if the taxpayers' goal is to help poor people, 1008 00:42:04,650 --> 00:42:08,190 then why shouldn't you make them as happy as possible, right? 1009 00:42:08,190 --> 00:42:11,070 If tax-- why am I giving money to this poor guy? 1010 00:42:11,070 --> 00:42:13,300 Because I'm sad his poor. 1011 00:42:13,300 --> 00:42:15,940 But, what you're saying, I'm not actually that sad he's poor. 1012 00:42:15,940 --> 00:42:17,930 I'm sad he's not eating. 1013 00:42:17,930 --> 00:42:19,760 If you're really just sad he's poor, 1014 00:42:19,760 --> 00:42:21,230 then you should give him money. 1015 00:42:21,230 --> 00:42:22,820 If what you're sad about is, gee, 1016 00:42:22,820 --> 00:42:23,810 I don't like how he's living-- 1017 00:42:23,810 --> 00:42:24,300 I don't like his-- 1018 00:42:24,300 --> 00:42:26,910 I'm sad he can't have better food to eat, sad at the place 1019 00:42:26,910 --> 00:42:27,410 he lives. 1020 00:42:27,410 --> 00:42:29,540 Then you're starting to impose your preferences, 1021 00:42:29,540 --> 00:42:30,498 but let's be important. 1022 00:42:30,498 --> 00:42:32,876 That's imposing your preferences. 1023 00:42:32,876 --> 00:42:33,548 Yeah? 1024 00:42:33,548 --> 00:42:35,590 AUDIENCE: I feel like the indifference curve only 1025 00:42:35,590 --> 00:42:37,570 goes for happiness or like contentedness, 1026 00:42:37,570 --> 00:42:40,680 but, really, the point of SNAP isn't really 1027 00:42:40,680 --> 00:42:42,690 with contentedness or happiness, but rather 1028 00:42:42,690 --> 00:42:45,900 like what would be to a more sustainable life. 1029 00:42:45,900 --> 00:42:48,483 JONATHAN GRUBER: Well, that's a related point of the taxpayer. 1030 00:42:48,483 --> 00:42:49,900 If the taxpayer cares about, look, 1031 00:42:49,900 --> 00:42:51,510 we want a healthy populace that's 1032 00:42:51,510 --> 00:42:54,090 going to live a long time and be productive and pay taxes, 1033 00:42:54,090 --> 00:42:55,990 then that would be a reason to do this. 1034 00:42:55,990 --> 00:42:58,560 But, once again, I want to emphasize, 1035 00:42:58,560 --> 00:43:00,385 OK, this is paternalism. 1036 00:43:00,385 --> 00:43:02,510 If you really just care what makes people happiest, 1037 00:43:02,510 --> 00:43:05,430 you should give them cash, OK? 1038 00:43:05,430 --> 00:43:10,410 So that raises two questions, OK? 1039 00:43:10,410 --> 00:43:14,760 First of all, first question-- yeah? 1040 00:43:14,760 --> 00:43:17,035 AUDIENCE: So how about like negative [INAUDIBLE].. 1041 00:43:17,035 --> 00:43:19,570 Because, for example, if we pump a lot of money-- 1042 00:43:19,570 --> 00:43:21,720 if we allow people to spend a lot on shelter, 1043 00:43:21,720 --> 00:43:23,345 that's not really going to help people. 1044 00:43:23,345 --> 00:43:25,530 It would just make the real estate developers rich. 1045 00:43:25,530 --> 00:43:28,440 And say the amount of shelter is kind of 1046 00:43:28,440 --> 00:43:30,962 fixed, but like the amount of food that eaten [INAUDIBLE].. 1047 00:43:30,962 --> 00:43:32,920 So, if we let people spend more money on food-- 1048 00:43:32,920 --> 00:43:34,480 JONATHAN GRUBER: Yeah, yeah, so, basically, that's 1049 00:43:34,480 --> 00:43:35,290 a great question. 1050 00:43:35,290 --> 00:43:36,250 And, in general, we're going to-- 1051 00:43:36,250 --> 00:43:37,660 I'm going to answer a lot of those questions 1052 00:43:37,660 --> 00:43:39,077 with the same cheat this semester, 1053 00:43:39,077 --> 00:43:41,410 which is we're going to assume the markets are perfectly 1054 00:43:41,410 --> 00:43:42,190 functioning. 1055 00:43:42,190 --> 00:43:45,183 So there's no-- you're imposing sort of a market failure. 1056 00:43:45,183 --> 00:43:47,350 If there's no market-- once there's market failures, 1057 00:43:47,350 --> 00:43:48,410 all bets are off. 1058 00:43:48,410 --> 00:43:50,710 But, with no market failure and no paternalism, 1059 00:43:50,710 --> 00:43:52,390 you'd want to give them cash. 1060 00:43:52,390 --> 00:43:55,000 So this raises an important question. 1061 00:43:55,000 --> 00:43:58,990 Do food stamps actually increase food purchases? 1062 00:43:58,990 --> 00:44:01,690 First of all, there's two reasons why they might not. 1063 00:44:01,690 --> 00:44:04,300 Reason one is everybody could be like y. 1064 00:44:04,300 --> 00:44:05,730 x is sort of a silly case, right? 1065 00:44:05,730 --> 00:44:07,726 You're going to die if you eat that little. 1066 00:44:07,726 --> 00:44:09,670 And food stamps aren't that much. 1067 00:44:09,670 --> 00:44:12,100 They're maybe like $3,000 a year. 1068 00:44:12,100 --> 00:44:14,210 Everybody is going spend $3,000 on food. 1069 00:44:14,210 --> 00:44:18,318 So the first issue is the first reason why food stamps may not 1070 00:44:18,318 --> 00:44:19,860 matter is that, in fact, everybody is 1071 00:44:19,860 --> 00:44:20,720 spending at least that amount. 1072 00:44:20,720 --> 00:44:22,640 Everybody is like y, and nobody is like x. 1073 00:44:22,640 --> 00:44:25,700 What's another reason why it might not matter? 1074 00:44:25,700 --> 00:44:28,030 What's a way people could get around food stamps? 1075 00:44:28,030 --> 00:44:28,530 Yeah? 1076 00:44:28,530 --> 00:44:30,150 AUDIENCE: Buy food with food stamps and sell it. 1077 00:44:30,150 --> 00:44:31,817 JONATHAN GRUBER: Yeah, they could set up 1078 00:44:31,817 --> 00:44:34,650 a black market where they, essentially, say, look, 1079 00:44:34,650 --> 00:44:36,272 I only want $2,000 of food. 1080 00:44:36,272 --> 00:44:37,980 The government is making it worth $3,000. 1081 00:44:37,980 --> 00:44:39,355 I'll buy my extra $1,000 of food, 1082 00:44:39,355 --> 00:44:41,160 and I'll sell it to people who do want it. 1083 00:44:41,160 --> 00:44:44,290 And I'll end up still eating $2,000 worth of food. 1084 00:44:44,290 --> 00:44:48,250 So we actually want to know do food stamps actually increase 1085 00:44:48,250 --> 00:44:49,690 food consumption in practice. 1086 00:44:49,690 --> 00:44:51,410 Are they making a difference? 1087 00:44:51,410 --> 00:44:54,850 Well, actually, we've run an experiment on this, OK? 1088 00:44:54,850 --> 00:44:57,070 We're going to talk in this class a lot 1089 00:44:57,070 --> 00:45:00,430 about empirical results in economics. 1090 00:45:00,430 --> 00:45:04,000 This class is mostly going to be a theoretical class. 1091 00:45:04,000 --> 00:45:06,550 That is we'll talk about models and ideas. 1092 00:45:06,550 --> 00:45:08,632 But we're also-- since, basically, I'm 1093 00:45:08,632 --> 00:45:10,090 an empirical economist, we're going 1094 00:45:10,090 --> 00:45:13,990 to talk about empirical economics, which is results 1095 00:45:13,990 --> 00:45:15,938 and testing the theories we develop. 1096 00:45:15,938 --> 00:45:17,730 Empirical economics, here's a great example 1097 00:45:17,730 --> 00:45:20,890 of empirical economics is we set up a theoretical model. 1098 00:45:20,890 --> 00:45:22,720 You always want to start with the theory, 1099 00:45:22,720 --> 00:45:24,550 but the theory sometimes has predictions, 1100 00:45:24,550 --> 00:45:25,390 which are uncertain. 1101 00:45:25,390 --> 00:45:27,640 Here we have an uncertain prediction from theory about 1102 00:45:27,640 --> 00:45:29,890 whether food stamps will affect food purchases or not. 1103 00:45:29,890 --> 00:45:31,150 So let's test it. 1104 00:45:31,150 --> 00:45:33,210 And the way we test it is we actually 1105 00:45:33,210 --> 00:45:37,175 have run food stamps cash out experiments where we literally 1106 00:45:37,175 --> 00:45:39,300 take guys on food stamps and give them cash instead 1107 00:45:39,300 --> 00:45:42,330 and watch what happens to their consumption before and after. 1108 00:45:42,330 --> 00:45:44,350 It's a real randomized trial. 1109 00:45:44,350 --> 00:45:46,050 We literally flip a coin. 1110 00:45:46,050 --> 00:45:47,700 Heads, you keep your food stamps. 1111 00:45:47,700 --> 00:45:49,290 Tails, we replace those food stamps 1112 00:45:49,290 --> 00:45:50,610 with an equal amount of cash. 1113 00:45:50,610 --> 00:45:53,010 Then we watch what happens. 1114 00:45:53,010 --> 00:45:59,450 What happens is that people spend about 15% less on food 1115 00:45:59,450 --> 00:46:01,430 when you give them cash instead of food stamps. 1116 00:46:01,430 --> 00:46:05,090 That is food stamps is forcing people to spend about 15% 1117 00:46:05,090 --> 00:46:06,560 more on food than they would like 1118 00:46:06,560 --> 00:46:08,470 to unconstrained by the cash. 1119 00:46:08,470 --> 00:46:08,970 Yeah? 1120 00:46:08,970 --> 00:46:11,505 AUDIENCE: Yeah, this gets you into the behavior of 1121 00:46:11,505 --> 00:46:12,200 [INAUDIBLE]. 1122 00:46:12,200 --> 00:46:14,510 I remember reading an experiment like, if you 1123 00:46:14,510 --> 00:46:17,230 have the price of gas go down, the actual like amount of money 1124 00:46:17,230 --> 00:46:19,895 spent on gas is constant. 1125 00:46:19,895 --> 00:46:21,520 And this might translate to food stamps 1126 00:46:21,520 --> 00:46:24,000 because like food stamps are like explicitly on food. 1127 00:46:24,000 --> 00:46:26,375 JONATHAN GRUBER: Yeah, you know, that's a great question. 1128 00:46:26,375 --> 00:46:29,028 And that's you're asking about richer theory, richer theory. 1129 00:46:29,028 --> 00:46:30,945 And I'm telling you that I'm going to give you 1130 00:46:30,945 --> 00:46:31,640 the empirical evidence. 1131 00:46:31,640 --> 00:46:33,080 So, whatever the theory is, the empirical evidence 1132 00:46:33,080 --> 00:46:33,840 tells you what happens. 1133 00:46:33,840 --> 00:46:35,810 And there's different explanations for why. 1134 00:46:35,810 --> 00:46:39,590 So the empirical evidence is that, basically, the price 1135 00:46:39,590 --> 00:46:43,200 of our paternalism is 15%, OK? 1136 00:46:43,200 --> 00:46:45,480 We are making people, effectively, 15% worse off. 1137 00:46:45,480 --> 00:46:48,760 We're making them spend 15% more food than they want to. 1138 00:46:48,760 --> 00:46:50,500 So is it worth it? 1139 00:46:50,500 --> 00:46:53,047 Well, actually, the evidence is starting 1140 00:46:53,047 --> 00:46:55,380 to pour in that it might not be worth it because there's 1141 00:46:55,380 --> 00:46:57,338 starting to be a lot of experiments where we're 1142 00:46:57,338 --> 00:46:59,940 giving people just cash, especially in developing 1143 00:46:59,940 --> 00:47:00,922 countries. 1144 00:47:00,922 --> 00:47:02,380 In developing countries, the answer 1145 00:47:02,380 --> 00:47:03,960 seems to be just giving people cash 1146 00:47:03,960 --> 00:47:06,260 makes them better off, that actually, 1147 00:47:06,260 --> 00:47:07,860 especially in developing countries, 1148 00:47:07,860 --> 00:47:10,410 people use the cash in productive ways. 1149 00:47:10,410 --> 00:47:14,643 So, for example, they have a series of evaluation programs 1150 00:47:14,643 --> 00:47:17,310 where they've given people cash, mostly in developing countries, 1151 00:47:17,310 --> 00:47:20,728 in Africa in particular, some in the US. 1152 00:47:20,728 --> 00:47:22,770 And they find that people spend relatively little 1153 00:47:22,770 --> 00:47:26,130 of that on drugs and alcohol, but they actually 1154 00:47:26,130 --> 00:47:27,707 tend to spend it productively. 1155 00:47:27,707 --> 00:47:29,790 And, in fact, they found, in developing countries, 1156 00:47:29,790 --> 00:47:32,070 this often provides valuable resources for individuals 1157 00:47:32,070 --> 00:47:33,250 to start businesses. 1158 00:47:33,250 --> 00:47:36,690 So they ran experiment Uganda where a nonprofit company 1159 00:47:36,690 --> 00:47:38,610 randomly offered a group of women 1160 00:47:38,610 --> 00:47:43,440 $150, which is huge relative to their income. 1161 00:47:43,440 --> 00:47:48,660 That's 50% to 100% of annual income in Uganda, $150. 1162 00:47:48,660 --> 00:47:53,010 And what they found was, after two months-- after 18 months, 1163 00:47:53,010 --> 00:47:55,560 these women had used that money to start businesses. 1164 00:47:55,560 --> 00:47:57,480 And that actually raised their earnings. 1165 00:47:57,480 --> 00:48:00,720 That actually effectively doubled their earnings. 1166 00:48:00,720 --> 00:48:05,220 From that one injection of cash, it 1167 00:48:05,220 --> 00:48:08,790 led them to actually double their annual earnings, OK? 1168 00:48:08,790 --> 00:48:10,890 So that leads one to think that maybe we 1169 00:48:10,890 --> 00:48:13,660 should stop being paternalistic and just give cash. 1170 00:48:13,660 --> 00:48:16,320 Unfortunately, if you're a reader of policy websites like 1171 00:48:16,320 --> 00:48:18,320 I am, the best one of which is vox.com-- 1172 00:48:18,320 --> 00:48:19,535 it's a great website-- 1173 00:48:19,535 --> 00:48:21,660 they had an article just the other day pointing out 1174 00:48:21,660 --> 00:48:24,118 how they actually followed these women up nine years later. 1175 00:48:24,118 --> 00:48:26,500 And, nine years later, the effect had totally gone away. 1176 00:48:26,500 --> 00:48:29,940 So the story isn't quite necessarily positive, 1177 00:48:29,940 --> 00:48:31,020 but it's not negative. 1178 00:48:31,020 --> 00:48:32,700 They're not worse off, but it looks 1179 00:48:32,700 --> 00:48:34,200 like, at least what in the short run 1180 00:48:34,200 --> 00:48:36,990 made them better off, well, that effect fades over time. 1181 00:48:36,990 --> 00:48:38,610 But the bottom line is, at this point, 1182 00:48:38,610 --> 00:48:39,750 I think the evidence is sort of probably 1183 00:48:39,750 --> 00:48:41,700 in favor of being less paternalistic 1184 00:48:41,700 --> 00:48:45,090 and just giving people cash, but that 1185 00:48:45,090 --> 00:48:47,670 runs into a lot of difficulties in terms of our concerns 1186 00:48:47,670 --> 00:48:49,350 about how people will spend it. 1187 00:48:49,350 --> 00:48:51,150 So let me stop there. 1188 00:48:51,150 --> 00:48:53,580 We will come back on Monday, and we'll 1189 00:48:53,580 --> 00:48:56,430 talk about how we actually go from this stuff to the demand 1190 00:48:56,430 --> 00:48:59,000 curves we started the class with.