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Why Hedonic Quality Adjustments Are Invalid

Quality changes can only affect relative prices, not overall price levels if the supply of goods, the supply of money, and the demand to hold money are all held constant.

Assume that a closed economy has only 10 goods, and that the ONLY change over the next year is an improvement in quality for each of the 10 goods. For simplicity assume that all 10 goods are packaged in such a way so that they all have the same price.

Assume that the improvements in quality are determined in the following way: Read more »


Evidence for Intelligent Design

The observations.

NORWICH (Reuters) - Many people have experienced the phenomenon of receiving a telephone call from someone shortly after thinking about them -- now a scientist says he has proof of what he calls telephone telepathy.


Peak Prescription Drugs

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"We recycle newspapers, we recycle soda cans, we recycle plastic," said Moshe Alamaro, the inventor, who is a visiting scientist at the Massachusetts Institute of Technology. "It's ludicrous not to recycle expensive drugs."

"Throwing away valuable resources when there is already not enough to go around is cavalier and unfeeling, not to mention poor public policy," said Josemaria Paterno, one of the medical students.

from NYTimes Read more »


Believe the Numbers?

Japan's Fuzzy Math and European Scare Tactics

Global Money Trends Magazine
Gary Dorsch, Editor Read more »


Subjective Value, a Useful Example

An astronaut sits at home in Telluride, Colorado, a month before leaving on an expedition to help found the first permanent human colony on the planet Mars.

In his den, he has two small statues of horses, one on each end of his fireplace mantle.

On the left end is a commercially produced statue made of sterling silver.

On the right end is another statue, the unique and signed work of a famous sculptor, now deceased, and made of bronze.

He is quite fond of both statues, but today he must choose between them one to pack up and send off to accompany him to Mars. Because of space and weight limitations, he cannot take both statues with him. Neither statue is significantly larger or heavier than the other, so this doesn't figure into the choice.

After contemplation, he packs up the sterling silver statue, demonstrating that it ranks higher on his subjective scale of value and that he would prefer to have it with him on Mars.

In the course of events, the expedition is cancelled as the lead sponsor pulls out to fight an anti-trust indictment on the part of the European Union.

The sterling silver statue is returned and once again takes its place on the left end of the mantle.

Two weeks later, returning from shopping, he finds his den in flames.

He barely has time to rescue one statue, but not both. Which statue will he choose to rescue?

If he chooses to rescue the bronze statue, this would demonstrate a preference for it, implying that it is now ranked higher on his subjective scale of value. Can this be reconciled with his earlier preference for the sterling silver statue, assuming no change in the intervening time in his relative fondness for both? Read more »


The 2-Liter Diet Sprite Price Inflation Indicator

Within the last two weeks the (North Shore Boston) Stop and Shop non- sale price for a 2 liter plastic bottle of Diet Sprite has been boosted from $1.39 to $1.59, jumping over the Shaw's price of $1.50. Prices of $1.19 and $1.29 still have leftover traces in my memory buffer, but the US Treasury has refused to date to make public releases of the trend of DS prices, nor even to suggest a hedonic quality adjustment, so this data must remain anecdotal. Read more »


Publish or Perish?

It is sometimes better to be thought a fool, than to launch your word processor and remove all doubt.

From Daniel Drezner :

In the pages of the Boston Globe, Harvard Law professor David Barron looks at how the city of Chicago is treating big box retailers and believes it to be a good thing: Read more »


How to Grow GDP

From Lawrence Parks

Please click it yourself, and keep Kip happy.


So You Think You Understand Stocks?

An NYSE corporation, Acme Alpha Assurance, symbol AAA, has a market capitalization of $1B and a cash holding of $100M in USD. With 100M outstanding shares, each share is worth $10.

On Friday, Warren Buffet is going to pay $1B for the entire company as a favor to its current majority owner, Bill Gates.

On Thursday evening, Acme issues a press release describing a material SEC filing that it has just made. Unfortunately, Omaha has temporarily lost its electricity and Warren only knows of the existence of the SEC filing, but not its detailed content.

There are five possibilities for the content :

1. The company has found that its $100M in cash has disappeared along with its CFO, and that this is an uninsured loss.

2. The company has issued a 10% share dividend to all shareholders, increasing the outstanding share count to 110M, effective immediately.

3. The company has issued a $1 cash dividend for each of its 100M outstanding shares, effective immediately.

4. The company has spent its $100M buying back stock, reducing the outstanding share count to 90M.

5. The company has made an instant secondary offering, selling 10M new shares for $100M, increasing the outstanding share count to 110M.

Not attempting to take advantage or to be disadvantaged by a changed situation, Warren will either leave his bid for the entire company unchanged, increase it by $100M, or decrease it by $100M, depending on the actual content of the SEC filing.

Out of 1,2,3,4, and 5 above,

a. Which ones of the 1-5 will result in an unchanged bid?

b. Which ones of the 1-5 will result in an increased bid?

c. Which ones of the 1-5 will result in a decreased bid?

Answers to follow. Read more »


More of a Sure Thing Than an Incumbent Congressman Successfully Seeking Re-election

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Between 2000 and 2005, 99 percent of the 435,000 federal criminal defendants prosecuted nationwide were convicted.

from Cato-at-liberty


When the Price of Gasoline Increases, Does Consumer Demand Rise Or Fall?

Answer : Both.

While the increased cost will result in at least some reduction in driving and gasoline consumption demand, that will be preceded by an increased demand to hold gasoline in the tank, resulting in more frequent and smaller sized fill-ups, and higher average tank contents over the entire vehicle population.


An Example of the Possible Divergence of Willingness-To-Pay and Preference

In a previous post, I suggested that I thought it reasonable to not be willing to pay the full price that would entirely offset the perceived benefit of a possible exchange. Some of the comments effectively suggested that if I was willing to pay only 80% of the price that would offset the perceived benefit I was either violating a definition or inadvertantly re-valuing money. Let me start with an example which attempts to address these issues.

Assume that I drink both Diet Sprite and Diet Pepsi at the same constant rate. Also assume that I subjectively value them both the same under all conditions and that I do not consider one as a possible substitute for the other.

In fact, there is only one thing that distinguishes one from the other.

If I go into a supermarket, I find that the price of the Diet Sprite is sometimes $1.50 for a 2 liter bottle and sometimes $0.79. In contrast, the price of a bottle of Diet Pepsi is always $1.50. Read more »


What Property of a Knife Determines Its Ease of Cleaning?

If I use a tableware knife to divide a cookie with a sticky chocolate frosting, the knife can easily be cleaned off with a paper towel.

OTOH, if I use a steak knife, the frosting cannot be removed without the application of hot water.

Considering all possible knives, is this difference one of composition, chemistry, surface mechanics, special coating, or a combination of these and possibly something else?


A Request and a Psych Analysis Puzzle

I'm still evolving my views on this Marginal Revolution Opportunity Cost problem. Read more »


Choosing From Among Your Opportunities

Visiting the health store in you local mall, circa 2040 :

Item #1

"The Fountain of Youth", a widget, color-coded red, plugs into the access port on your pacemaker, makes you feel like 25 again, price = $40,000

Item #2

"The Fountain of Middle Age", a widget, color-coded green, plugs into the access port on your pacemaker, makes you look like 45 again, price = $15,000

Item #3

"The Fountain of Retirement Age", a widget, color-coded blue, plugs into the access port on your pacemaker, makes you think you are 65 again, price = $5,000 Read more »