Alternate Contest Presentation

In a previous contest post , an economic theory was requested to explain why consumers would require a very large premium to resell some goods that were just purchased, but would require a much smaller premium for other goods.

See the earlier post for details.

The following is really the same problem presented in a more concrete manner:

A consumer has just returned to the parking lot at the close of business after a mystery retail purchase of $2000. When intercepted by a television reporter, he honestly replies to the reporter's question as to how many dollars he would be willing to accept to give up his purchase.

If the purchase was of item X, the response might be in the range of $2100 to $2200. (+5% to 10%)

If the purchase was of item Y, the response might be in the range of $2500 to $4000. (+25% to 100%)

Is item X the 5 troy ounce gold bar and item Y the 56-inch large screen TV, or vice versa?

Explain your choice based on economics and logic.


Follow-up:
Austrian Subjective Use-Value Share this

With either item, the

With either item, the consumer could sell now, go back the next day and buy another one, and wind up with his new product and some extra cash. So the question is why he would demand a higher cash payment for the delay on one item than the other. I have two answers:

1. The TV is a pain in the ass to transport from the store to the car, while the gold is light. So it takes a higher premium to induce the consumer to incur the transportation cost again.

2. The 7th game of the World Series is tonight, and the consumer really wants to watch it on the big-screen TV. Waiting until tomorrow for his TV means forgoing that opportunity. The gold, on the other hand, would just sit in his drawer overnight. So giving up the TV for one night involves a higher opportunity cost, with correspondingly higher premium.

The $2100-$2200 definitely

The $2100-$2200 definitely has to be the gold, because people generally buy gold with the *intent* of reselling it, as an investment. Therefore, an immediate return of 5-10% is decent. As for the television, it is not the same as every other television, and the person bought it with the intent of keeping it, not of reselling it.

On the other hand, if someone offered *me* 25% over what I'd just paid for a TV, they could have it :)

There is no correct answer

There is no correct answer to this question as each individual values the two items differently, hence the subjective theory of value.

In fact, this is just another spin on the Diamond/Water paradox that "baffled" economists for years (http://en.wikipedia.org/wiki/Labor_theory_of_value). Micha touched on this: www.catallarchy.net/blog/cgi-bin/archives/012344.html

That said, item X is obviously the gold bar : )

Crap, I meant to link to

Crap, I meant to link to this Wikipedia article, not the one on the LTV: http://en.wikipedia.org/wiki/Diamond-water_paradox

Presumably, all gold bars

Presumably, all gold bars are the same, whereas TVs come in various shapes and sizes. The consumer will have had to have spent little time if any deciding which gold bar to choose, whereas when shopping for a 56-inch large screen TV, the consumer in all likelihood will have spent a lot of time deliberating over his options. The elements the consumer would factor in to his resale price would, to my mind, include compensation for the amount of time/effort he expended in selecting the good. As the consumer will have spent more time/effort in buying the TV, the compensation for the TV would be higher than that of the gold bar, and thus, ceteris paribus, the markup would be higher on the TV.

X = gold bar, Y = TV

Glen, unbeliever, Everything

Glen, unbeliever,

Everything you say is true, but not quite what I'm looking for. If the town had an ordinance that made it illegal to sell without a $25K vendor's licence, there would be no sales, and your arguments would not really apply. Since there is no sale, there will be no replacement expenses. The consumer can still have an opinion as to how much cash he would require as a minimum to give up his purchases. This would be a forward looking number, as all of his expenses and efforts involved in the original purchase are now sunk costs and should not greatly rationally interfere. I'm certainly willing to accept a residual psychological effect here, but nowhere near the total of either the original or replacement external costs.

Regards, Don

Sean and Tim, "The

Sean and Tim,

"The $2100-$2200 definitely has to be the gold, because people generally buy gold with the intent of reselling it, as an investment. Therefore, an immediate return of 5-10% is decent. As for the television, it is not the same as every other television, and the person bought it with the intent of keeping it, not of reselling it."

"There is no correct answer to this question as each individual values the two items differently, hence the subjective theory of value."

There are parts of these two replies that need to be combined to make progress. Does someone want to give it a try?

Regards, Don

Hmm, I contend that the two

Hmm, I contend that the two comments are mutually exclusive. I have no problem with Sean's line of reasoning per se, but it's his and not an objective finite answer to your [trick] question as there cannot be -- it depends on each individual.

Herein lies the problem, I cannot give you the real reasoning behind the point at which the reseller hawks his products at as I am not connected to his brain and therefore cannot see why he has certain preferences or values material differently.

If I was doing the hawking I'd keep both of the products and sell them on ebay.

Vice versa. The consumer

Vice versa. The consumer most likely subjectively values the gold as a savings strategy. When asked how many dollars he will accept for it, he thinks of the amount of dollars he is hoping to get for it after a few months or years of inflation of the dollar supply, a major change. When asked how many dollars he will accept if his purchase was of the screen, he assumes an immediate transfer of delivery to someone who was hoping to buy that model but was late getting to the store is proposed and just calculates adding a fair amount to what he paid to compensate himself for the trouble of going back to the store another day and ordering another screen of that model delivered, which is virtually a commodity because of the low defect tolerances required for success in high technology manufacturing. (If he had to carry the 56-inch box to the parking lot himself, then his purchase would not be a "mystery" to a television reporter, whose job requires him not to be blind.)

X (5 to 10%) = TV, Y (25 to 100%) = gold bar, because when the consumer would "resell" or "give up his purchase" is not stated in the question as posed here, and therefore becomes a legitimate part of the range of possibilities to be analyzed by the "logic" of detective stories.

I'm much more naive than the

I'm much more naive than the average poster to this blog, but I have some thoughts on this that I want to put forward.

I also think X is the TV and Y is the gold bar.

Mostly this is because I think the purchaser of the TV is interested in immediate gratification (after all, people buy TVs to watch, not as an investment). He will accept nearly the same price for the TV because he will be fairly sure that he can get a replacement TV without trouble at virtually the same price he just paid.

The purchaser of the gold bar, on the other hand, is focused on the potential appreciation in value of his investment. Someone who makes a significant investment in bullion is likely to be aware that the gold price can be extremely volatile, and that the gold commodity market reacts with great speed and force to news events such as unemployment figures and war reports. A gold investor would naturally be convinced that he was buying at a dip. It's not unreasonable that such a person might think something like, "What if the price of gold should as much as double before I get the chance to buy it again?"

Also factor in the small to moderate probability that he might be buying gold as a safety measure against various sorts of disasters. People buy insurance to feel protected against misfortunes, and would be extremely disinclined, once that protection is gained, to give it up (however temporarily) for any period of time in which they might possibly be vulnerable to such a misfortune.

Well, that's the economics... the logic? Uh, well... (looks uncomfortable) That's what all I would do, anyway. :)

My point was that the best

My point was that the best way to explain a story is to look at the details of that story closely and literally, and reenact how the participants saw things. Ignore any theoretical context in which someone may be presenting the story as an example of an abstract economic law. How does the man on the street know to interpret a question so his answer is relevant to a theory that it will later be used to justify?

As for the economic complications: Not only are valuations subjective, but everyone's previous experience and knowledge of trading is different, which makes their strategies of trying to profit different, even when they would rank valuations in the same order.

So I look at the story for clues, just as I look skeptically at news articles about polls for clues as to what the respondents might have been really thinking or trying to say that is different from the headline.

Now I think what really happened behind this mystery is that the story is an updating of a joke: The shopper who had a television wanted a lot more for it because he wanted to see himself on TV when he got home.

All, I appreciate all of

All,

I appreciate all of your comments, even though I may not have replied directly to them.

Later today I will post my understanding of just what is involved in producing large selling premiums for some goods and not others.

I will extend the prize offer for comments, corrections and additions for THAT, but I will only refer to that here.

I have come to believe that the formulation of the problem contributed to the difficulty in dealing with it, mine as well. It seems to turn out that the selling premium over buying is primarily connected to the buying price, not the selling price. This means that starting with equal $2000 BUYING prices only leads to confusion.

Austrian Economics tends to concentrate on the implications of the fact that men act purposefully. It attempts to refrain from passing judgments on the purposes themselves. This may help explain why I have not responded to comments that seem to deal with the internal thought processes of consumers. I have read them, however, and would have responded if I saw something that I found to be unreasonable.

Thank you all, Don