A NON-GRAPHICAL APPROACH TO TEACHING UTILITY/CHOICE THEORY IN UNDERGRADUATE ECONOMICS COURSES

Transcription

1 A NON-GRAPHICAL APPROACH TO TEACHING UTILITY/CHOICE THEORY IN UNDERGRADUATE ECONOMICS COURSES Mickey A. Hepner Department of Economics University of Central Oklahoma 100 N. University Dr. Edmond, OK Phone: (405) Fax: (405) Abstract The traditional approach to teaching choice theory to undergraduate students uses indifference curve/budget constraint graphs. Unfortunately, this technique does not closely resemble the decision-making process and consequently, is being de-emphasized in many Principles of Microeconomics texts. This paper presents an alternative approach, used by the author, which is relatively simple to use and understand. This technique is then applied to analyze the decision to purchase a good, various labor market decisions, and a variety of other decisions. Because this framework provides a simple approach to understanding choice theory, instructors in many different economics courses can use it. Some of these courses include microeconomics principles, labor economics, public choice, the economics of the family, and the economics of crime.

2 I. INTRODUCTION Economics in its purest form is the study of choices. How do individuals choose which products to buy? How do changes in prices influence purchase decisions? Why do some people choose lower-paying jobs over higher-paying ones? Microeconomics students cannot fully answer these real-world questions unless they possess some understanding of choice theory. Unfortunately, the traditional technique of covering choice theory in most undergraduate microeconomics courses using indifference curves and budget constraint diagrams lacks an intuitive foundation to help students better understand individual behavior. Textbook authors typically couple their discussion of indifference curves with a disclaimer that admits the diagrams do not closely resemble the consumer decisionmaking process. For example, Mankiw (2003) states: At this point, however, you might be tempted to treat the theory of consumer choice with some skepticism. After all, you are a consumer. You decide what to buy every time you walk into a store. And you know that you do not decide by writing down budget constraints and indifference curves. (p.475) Consequently, it is no surprise that indifference curve/budget constraint analysis is disappearing from Principles textbooks. Of nine popular Principles of Microeconomics textbooks surveyed by the author, only one Mankiw s (2003) text devotes a chapter to indifference curve/budget constraint analysis. However, this chapter is included in a supplemental section and is not part of the main text. Five texts Miller (2003), Bade & Parkin (2003), Schiller (2003), McConnell & Brue (2002), and McEachern (2003) relegate the analysis to an appendix. Three other texts Frank & Bernanke (2003), Tucker (2003), and Hall & Lieberman (2003) ignore the topic completely.

3 In place of the indifference curve/budget constraint model, all nine texts rely upon an informal introduction of the concept of utility and its effects on the decision-making process. Unfortunately, this informal explanation of consumer behavior still does not closely resemble the behavior of individuals, nor does it provide a framework that enables students to analyze a variety of choices. There needs to be a new approach to teaching utility and choice theory to undergraduate students. There needs to be an approach that students can intuitively understand and consistently apply, so they can analyze the various decisions individuals make. This paper presents a technique successfully employed by the author to teach utility/choice theory in a Principles of Microeconomics course. This technique, using utility tables, combines the intuitive explanations that students desire, with a framework students can use to analyze individual behavior in a variety of situations. While the technique is most suited for Principles students, instructors of other undergraduate microeconomics courses can easily apply the framework to analyze additional types of individual decisions. This paper proceeds as follows. Section II introduces the utility table framework and applies it to analyze the decision to purchase a product. Section III discusses how instructors can use utility tables to analyze various labor market choices. Section IV presents brief applications for other choices. Finally, Section V concludes. II. THE UTILITY TABLE FRAMEWORK The most important reason that students prefer the utility table approach to indifference curve analysis is that it is more intuitive. With this framework, students can readily recognize the motivation behind every decision because the decision-making

4 process depicted in the model resembles the decision-making process utilized in the real world. Since economists generally assume individuals compare benefits and costs from each decision (sometimes only implicitly), the framework assumes that individuals consider: 1) the expected gain from an action, 2) the expected loss from an action, and 3) the net benefit from an action. Generally, if the expected gain exceeds the expected loss (the net benefit is positive), then the individual undertakes the action. However, if the expected loss exceeds the expected gain (the net benefit is negative), then the individual does not undertake the action. The utility tables name comes from incorporating these terms in a tabular format, as illustrated below. Incorporating economic terms into the framework is straightforward. The expected gain is simply the additional or marginal utility from undertaking the action. The expected loss (or the utility the individual must give up in order to undertake the action) is the opportunity cost the value of the best opportunity foregone. If the net benefit of an action is positive, then the marginal utility (gain in utility) exceeds the opportunity cost (loss in utility), and the action increases total utility. On the other hand, if the net benefit is negative, then the action decreases total utility. The Decision to Purchase a Good To use the utility table framework to understand the decision to purchase a good, one must determine the marginal utility from purchasing the good, the opportunity cost, and compute the net benefit. As will be shown below, this comparison is no different than the traditional explanation that individuals compare the marginal and market rates of substitutions. Unfortunately for students, textbooks often measure utility only abstractly in terms of utils. In order to make the net benefit computation for the utility

5 tables, however, marginal utility and opportunity cost both need to be measured in the same units. Fortunately, we can often measure utility and costs in monetary terms. This move away from the abstract and towards the tangible, adds to the appeal of the utility table framework. How can we measure utility in dollars? Well, students readily recognize that for things that are more valuable to us, we should be willing to sacrifice more. Likewise, individuals should be willing to pay more for goods that generate more utility. Note that they may not have to pay more, but are willing to pay more for goods that generate more utility. Thus, we can use a person s willingness to pay as a measure of the marginal utility the person expects to derive from the good. While the marginal utility is what a buyer is willing to give up to make the purchase. The opportunity cost is what the buyer must give up in order to make the purchase. In this case, when a buyer spends money to purchase a product, the buyer gives up the opportunity to use that money to make another purchase. For example, if a student purchases an economics textbook priced at $70, the buyer gives up the opportunity to buy other goods valued at $70. Thus, the opportunity cost is the value of the other goods given up, or simply the price of the good. The utility-table framework therefore, predicts that a buyer will purchase a good if and only if their willingness to pay exceeds the price of the product. At this point in the discussion, students generally raise two questions. First, what if there are two products with a positive net benefit? In this case, the buyer will decide to buy both products because both products increase utility. Second, what if a person is choosing between two substitutes and they both have a positive net benefit? If a person is

6 truly choosing between two substitutes, then only one will have a positive net benefit. To illustrate this important point, consider a student deciding whether to purchase a textbook at different bookstores with different prices. Suppose at one bookstore the price is $70, while the price is only $65 at the other bookstore. Knowing that the price at the cheaper bookstore is $65, why would a person be willing to pay more than $65 at the other bookstore? Students readily recognize similarities to their own textbook shopping experiences. They intuitively understand that they would not be willing to pay more than $65 for the book at the expensive store, and consequently would not purchase the book if it is $70. It is important to stress that the marginal utility in this approach is not an abstract value, but represents what a person is truly willing to pay for the product. By incorporating some hypothetical values for marginal utility and opportunity cost, the instructor can operationalize the utility table concept. Table 1 presents a utility table for the decisions of whether to purchase two different economics textbooks a required text and a recommended text. For most students, the required text would generate more expected utility, and therefore a higher willingness to pay. In this example, a hypothetical student is willing to give up $80 for the required text, but only $30 for the recommended text. The price for each text is $70. Thus, for each book purchased the student must forego $70 of other products. Consequently, the required text generates a net benefit of $10, while the recommended text generates a net benefit of $-40. Once students are acquainted with the utility-table framework, they can easily deduce that this hypothetical student would choose to purchase the required text, but not the recommended one. Most importantly, students can better understand the rationale behind this decision: that for this hypothetical student the expected gain from the required

7 text (as measured by the amount the student is willing to sacrifice for the book) exceeds the expected loss (as measured by the amount the student is required to sacrifice for the book). In a similar fashion, students can easily understand why consumers choose not to buy the recommended text: the expected loss from the text (as measured by the amount the student is required to pay) exceeds the expected gain from the text (as measured by the amount the student is willing to pay). Because this explanation more closely mirrors the actual decision-making process, students can more easily understand the relevance of economic theory in explaining real-world behavior. Note that this framework is equivalent to the traditional indifference curve/budget constraint approach. The traditional model requires consumers to compare their individual marginal rate of substitution (relative marginal utilities) to the market rate of substitution (relative prices) in choosing optimal consumption bundles. This still requires consumers to compare what they are willing to pay to what they are required to pay. The only difference is that the utility table framework makes the comparison in terms of dollars, while the traditional approach is in terms of goods. Deriving Individual Demand One of the benefits of the traditional indifference curve/budget constraint analysis is its usefulness in deriving an individual demand schedule. The individual demand for a product is determined by the interaction between that product s price and the individual s willingness to pay. Since both of these factors appear in the utility table, it should not be surprising that the utility table framework can also be used to derive the individual demand relationship, albeit in a non-graphical form. Table 2 depicts an example of such

8 an application, by analyzing a hypothetical student s choice to purchase a product (in this case an economics text) at two different prices. In the first scenario, the price of the text is $70, while in the second scenario the same text is priced at $85. Under both scenarios, the marginal utility for a hypothetical student is assumed to be $80. Consequently, the $70 text generates a net benefit of $10, while the $85 text generates a net benefit of $-5. Because of the positive net benefit, this hypothetical student will choose to purchase the $70 text, but will choose not to purchase the $85 text. In the utility table framework, higher prices lead to a smaller net benefit because the buyer is required to sacrifice more to make the purchase. As prices continue to increase, the net benefit eventually becomes negative. At this threshold level, the buyer will choose to not make the purchase. Thus, at higher prices the buyer is less willing and able to make a purchase the familiar individual demand relationship. Diminishing Marginal Utility Another sufficient (although not necessary) way to derive the individual demand schedule is with the concept of diminishing marginal utility, which can also be illustrated with the utility table framework. Table 3 presents this analysis by depicting a hypothetical student s choice to purchase either one or two copies of an economics text. When the author introduces this concept in class, he always asks the students why the students only purchase one copy of the text. After all, they had the opportunity to purchase multiple copies. Instinctively, the students understand that while the second copy may be somewhat useful and convenient, the expected gain from the second text is not as high as the first. Within the utility table framework, this decline in the expected gain appears as a decrease in marginal utility the hypothetical student is only willing to

9 spend $10 for the second text and therefore a decrease in the net benefit from the action. Thus, in order to entice this hypothetical buyer to purchase a second copy of the text, the price must be less than $10. If prices decrease enough, this hypothetical buyer will be willing and able to purchase more the individual demand relationship. III. LABOR MARKET DECISIONS Once an instructor introduces the utility table framework, application to labor market decisions is straightforward. While these decisions are not always covered in a Principles of Microeconomics course, the utility table framework provides a simple means to explore these topics in a quick fashion. Consequently, instructors can expose Principles students to other applications of microeconomics without sacrificing much class time. Additionally, instructors in a Labor Economics course can also use the utility table framework. The applications to this type of course are particularly interesting. Because this approach does not rely upon two-dimensional graphs, one can use utility tables to analyze decisions involving three or more alternatives. Work-Leisure Choice Tables 4 and 5 present utility tables for the traditional labor-leisure choice. The decision, in these examples, is between working an additional hour or consuming an additional hour of leisure. Table 4 represents the scenario where an individual will choose to work an additional hour. Table 5 presents the case where an individual will choose to consume an additional hour of leisure. In the traditional labor-leisure choice model, the utility derived from an hour of labor is the hourly wage rate. If an individual earns $15 per hour, then the marginal utility

10 from working an additional hour is $15. The marginal utility for an additional hour of leisure is not as apparent, however. At this point though, students recognize that the value an individual places on something is measured by how much the person is willing to give up for it. Consequently, the value in the marginal utility of leisure cell is the amount of income the individual is willing to forego in order to consume an additional hour of leisure. In Table 4, the hypothetical person is willing to give up $12 for the additional hour of leisure. Note that this value is also the reservation wage for the individual. The next step is to determine the opportunity cost for both work and leisure. If the hypothetical individual consumes an additional hour of leisure, the individual foregoes the opportunity to work for that hour and earn $15. On the other hand, if the individual works an additional hour, the individual foregoes the opportunity to consume an additional hour of leisure, valued at $12 per hour. These hypothetical values result in a positive net benefit from working an additional hour, and a negative net benefit from consuming an additional hour of leisure. Table 5 presents a similar analysis, except the individual places a higher value on leisure. In this example, the individual is willing to forego $17 of income in order to consume an additional hour of leisure. This higher value for leisure also increases the opportunity cost for working an additional hour. These hypothetical values result in a negative net benefit from working, and a positive net benefit from leisure. Thus, this individual will choose to consume more leisure. Because of the simple nature of the utility table framework, students can quickly recognize the central result of the work-leisure model: that individuals will choose to work only if the income from work exceeds the value of leisure (the reservation wage).

11 To arrive at this result, the student did not require any mathematical proofs, or complex income-leisure diagrams. All that is required is a simple extension of the utility table framework. Work-Leisure-Household Work Choice One common critique of the work-leisure model, is that it only considers two alternative uses of one s time. This is mainly a result of relying on a two-dimensional graphical model. Clearly, though, not all time spent away from work is leisure time. Fortunately, the utility-table framework can accommodate the inclusion of additional alternatives. Table 6 is a utility table that considers three alternative uses of one s time: 1) paid work, 2) leisure, and 3) household work. This is the tri-partite choice generally introduced in labor economics texts. As in the traditional work-leisure model, the marginal utility from an additional hour of paid work is simply the hourly wage. Also, the marginal utility of an additional hour of leisure and an additional hour of household work is the amount of income the individual is willing to forego for each option. In Table 6 the marginal utility of paid work, leisure, and household work are $15 per hour, $12 per hour, and $14 per hour respectively. The value of the opportunity costs is also straightforward although students often need reminding that opportunity costs are the value of the best opportunity foregone. For Table 6, the opportunity cost of paid work, leisure, and household work are $14 per hour, $15 per hour, and $15 per hour respectively. Thus, paid work generates a positive net benefit of $1, while leisure and household work both generate negative net

12 benefits. Consequently, this individual will choose to engage in paid work during this particular hour. Table 7 depicts the scenario where a person facing the tri-partite choice will choose to engage in household work instead. In this example, the individual is willing to forego $17 per hour of income in order to engage in household work. This larger value placed on household work also affects the opportunity costs for work and leisure, as household work now becomes the best opportunity foregone. The net result is that household work now generates a positive net benefit, while paid work and leisure generate negative net benefits. These examples highlight three important points. First, no matter how many alternatives are available, there is only one choice that generates a positive net benefit. All other options must generate a negative net benefit. Second, individuals choose the alternative that is the most valuable. An individual will choose to engage in paid work only when it is more valuable to the individual than any other option. Likewise, a person will consume more leisure or do household work only when those options are more valuable than any other alternative. Finally, the utility-table framework can easily incorporate three or more alternatives (unlike the two-dimensional graphical representation). Compensating Wage Differentials One can also apply the utility-table framework to analyze the case where labor itself generates utility or disutility. A bright student will quickly notice that with the traditional work-leisure model, the payoff to work is only income. By also illustrating the case where marginal utility includes nonpecuniary benefits to work, an instructor can

13 quickly reassure these bright students that economic analysis can incorporate the notion that some jobs are inherently enjoyable, while others are unenjoyable. Tables 8 and 9 present the case where the nonpecuniary job characteristics influence the decision of whether to accept a pleasant job paying $25,000 per year or an unpleasant job paying $50,000 per year. Some individuals would choose to forego the higher income from the unpleasant job for a lower-paying pleasant job (perhaps the pleasant job offers a more flexible work schedule, less stressful work environment, or is inherently enjoyable to the worker). These individuals must value the nonpecuniary benefits more than the difference in pay (for example $30,000). This value represents how much income the worker is willing to forego in order to have the pleasant job characteristics. With the pleasant job, the worker is receiving $25,000 per year in income and nonpecuniary benefits valued at $30,000. If the worker takes the higher-paying unpleasant job, then the worker will forego both the $25,000 income and the nonpecuniary benefits. Table 8 presents this scenario. With these hypothetical values, the pleasant job offers a positive net benefit, while the unpleasant job offers a negative net benefit. Thus, the worker will accept the lower-paying pleasant job. On the other hand, some individuals choose to accept unpleasant jobs. These individuals must value the additional pay of the unpleasant job more than the nonpecuniary benefits of the pleasant job. In this scenario, the worker values the nonpecuniary benefits at only $15,000. Table 9 presents this case. With these values, the unpleasant job generates a positive net benefit, while the pleasant job generates a negative net benefit.

14 IV. OTHER DECISIONS Because the utility-table framework is simple to employ and understand, instructors can also use it to cover a variety of topics in different undergraduate economics courses. Some supplemental topics the author covers in his courses include the decision to marry, the decision to commit a crime, the decision to go on welfare, and a politician s decision on whether to support a bill. This section briefly presents the utility-table analysis for these decisions. The Decision to Marry While the utility-table framework does not require that marginal utility, opportunity costs, and net benefit be in monetary terms, individuals implicitly place monetary values on many decisions. For example, the decision to marry is often based on nonpecuniary factors. As Becker (1973, 1974) showed however, the decision to marry also has financial implications. Thus when choosing whether to marry, couples must compare monetary values with nonpecuniary factors. In order to make such a comparison, couples must place an implicit monetary value on these nonpecuniary factors. Table 10 presents the framework for the decision to marry. Students can readily notice that as long as the value of the nonpecuniary benefits of marriage is large enough, then the couple will choose to marry despite the presence of a marriage tax. On the other hand, students can easily illustrate why some couples choose to not get married by showing smaller nonpecuniary benefits to marriage.

15 The Decision to Commit a Crime Table 11 presents the utility table for the decision to commit a crime. In this hypothetical example, the potential criminal can gain $10,000 from committing a crime. Committing a crime however, comes with potential costs. If caught, the criminal faces the possibility of time in jail resulting in lost income and lost freedom. If the expected value of this penalty is $5,000 then committing the crime generates a positive net benefit. If the person does not commit the crime, then the person does not lose the $5,000 penalty nor do they gain the $10,000 payoff. With this framework students can readily answer many questions like: 1) why tougher penalties can reduce crime, 2) why a lower probability of being caught (and therefore a lower expected penalty) can increase criminal activity, 3) why some people would never commit a crime (large nonpecuniary benefits to living crime-free). The Decision to Receive Public Assistance There are many individuals who are eligible for public assistance, but choose to not receive the benefits. Robert Moffitt (1983) demonstrated that the stigma associated with public assistance can keep some eligible individuals from wanting to receive benefits. One can use the utility-table framework, as presented in Table 12, to illustrate this scenario. In this table, the individual is eligible to receive $500 per month in public assistance. However, by receiving assistance the individual must also endure the stigma from receiving assistance. If this person values this nonpecuniary stigma at a level exceeding $500, then receiving assistance generates a negative net benefit. This framework helps students to easily understand the factors influencing an individual s decision to receive public assistance.

16 A Politician s Decision to Support a Bill The simplicity of the utility-table framework allows a student to analyze many different types of decisions, including those not measured in monetary terms. For example, one could analyze the decision of a politician to support a popular bill. Instead of measuring the marginal utility, opportunity costs, and net benefits in terms of dollars, a student could use the votes. Table 13 presents a utility table depicting a politician s decision to support a popular bill. By supporting a popular proposal, a politician can expect to receive additional support from the electorate. In Table 13, the politician receives 1,000,000 additional votes for supporting the measure. However, even popular measures are unpopular with some groups. By supporting the bill, the politician in Table 13 expects to lose 850,000 votes. Thus, supporting the bill generates a positive net benefit for the politician and a yea vote on the bill. Students can extend this simple framework to further understand why some politicians would stand on personal conviction and oppose a popular bill. For this to occur, the politician must receive some non-pecuniary benefit from standing on principle, that outweighs the vote loss. V. CONCLUSION This paper presented a simple framework that students can use to understand the decisions individuals make on daily basis. The framework, based on choice theory, uses a tabular format to compare the expected gains and losses from any decision. The traditional approach to teaching choice theory to undergraduate students, using indifference curves and budget constraints, lacks an intuitive foundation and does not closely resemble the decision-making process. However, the framework introduced in

17 this paper more closely resembles the way individuals make decisions. Consequently, this framework offers great promise to helping undergraduate microeconomics students better understand the motivations behind every-day decisions. The utility-table framework presented in this paper also can conveniently be extended to cover other types of decisions that are not easily examined with indifference curve analysis. Hence, instructors in other undergraduate economics courses that utilize choice theory can also employ this framework. Some of these other courses include courses in labor economics, public choice, the economics of the family, and the economics of crime. By offering a more realistic, more intuitive, and more simple approach to understanding choice theory, the utility-table framework can help students understand how economic choice theory applies to their daily lives.

18 REFERENCES Bade, Robin & Parkin, Michael (2003). Foundations of Microeconomics, Second Edition. Pearson Addison-Wesley. Boston, Massachusetts. Becker, Gary (1973). A Theory of Marriage: Part 1. The Journal of Political Economy. Vol. 81, No. 4: Becker, Gary (1974). A Theory of Marriage: Part 2. The Journal of Political Economy. Vol. 82, No. 2, Part 2:Marriage, Family Human Capital, and Fertility: S11-S26. Frank, Robert & Bernanke, Ben (2003). Principles of Micro Economics, Second Edition. McGraw-Hill/Irwin. New York, New York. Hall, Robert & Lieberman, Marc (2003). Microeconomics: Principles and Applications, Second Edition. Thomson South-Western. Mason, Ohio. Mankiw, N. Gregory (2003). Principles of Microeconomics, Third Edition. Thomson South-Western. Mason, Ohio. McConnell, Campbell & Brue, Stanley (2002). Microeconomics: Principles, Problems, and Policies. McGraw-Hill/Irwin. New York, New York. McEachern, William (2003). Microeconomics: A Contemporary Introduction. Sixth Edition. Thomson South-Western. Mason, Ohio. Miller, Roger LeRoy (2003). Economics Today: The Micro View. Twelfth Edition. Addison Pearson-Wesley. Boston, Massachusetts. Moffitt, Robert (1983). An Economic Model of Welfare Stigma. American Economic Review. Vol. 73, No.5 (December): Schiller, Bradley (2003). The Micro Economy Today, Ninth Edition. McGraw-Hill/Irwin. New York, New York. Tucker, Irvin (2003). Micro Economics for Today, Third Edition. Thomson South- Western. Mason, Ohio.

19 THE DECISION TO PURCHASE A GOOD Table 1 The Choice to Purchase a Good Required Economics Text Recommended Economics Text Marginal Utility $80 $30 Opportunity Cost $70 $70 Net Benefit $10 $-40 Decision Buy Do Not Buy Table 2 Deriving Individual Demand Required Economics $70 Required Economics $85 Marginal Utility $80 $80 Opportunity Cost $70 $85 Net Benefit $10 $-5 Decision Buy Do Not Buy Table 3 Diminishing Marginal Utility Required Economics Text First Copy Required Economics Text Second Copy Marginal Utility $80 $10 Opportunity Cost $70 $70 Net Benefit $10 $-60 Decision Buy Do Not Buy Table 4 Work-Leisure Choice Choosing Work Work an Additional Hour Leisure an Additional Hour Marginal Utility $15/hour $12/hour Opportunity Cost $12/hour $15/hour Net Benefit $3 $-3 Decision Work Additional Hour Do Not Leisure Additional Hour

20 LABOR MARKET DECISIONS Table 5 Work-Leisure Choice Choosing Leisure Work an Additional Hour Leisure an Additional Hour Marginal Utility $15/hour $17/hour Opportunity Cost $17/hour $15/hour Net Benefit $-2 $2 Decision Do Not Work Additional Hour Leisure Additional Hour Table 6 Work-Leisure-Household Work Choice Choosing Work An Additional Hour of: Paid Work Leisure Household Work Marginal Utility $15/hour $12/hour $14/hour Opportunity Cost $14/hour $15/hour $15/hour Net Benefit $1 $-3 $-1 Decision Work Additional Hour Do Not Leisure Additional Hour Do Not Do Household Work an Additional Hour Table 7 Work-Leisure-Household Work Choice Choosing Household Work An Additional Hour of: Paid Work Leisure Household Work Marginal Utility $15/hour $12/hour $17/hour Opportunity Cost $17/hour $17/hour $15/hour Net Benefit $-2 $-5 $2 Decision Do Not Work Additional Hour Do Not Leisure Additional Hour Do Household Work an Additional Hour

21 LABOR MARKET DECISIONS (CONT.) Marginal Utility Table 8 Compensating Wage Differentials Choosing a Pleasant Job Pleasant Job $25,000/year + $30,000/year (nonpecuniary benefits) Unpleasant Job $50,000/year Opportunity Cost $50,000/year $55,000/year Net Benefit $5,000/year $-5,000/year Decision Take Pleasant Job Do Not Take Unpleasant Job Marginal Utility Table 9 Compensating Wage Differentials Choosing an Unpleasant Job Pleasant Job $25,000/year + $15,000/year (nonpecuniary benefits) Unpleasant Job $50,000/year Opportunity Cost $50,000/year $40,000/year Net Benefit $-10,000/year $10,000/year Decision Do Not Take Pleasant Job Take Unpleasant Job

22 Marginal Utility OTHER DECISIONS Table 10 The Decision to Marry Get Married $25,000/year + $15,000/year (nonpecuniary benefits) Remain Single $30,000/year Opportunity Cost $30,000/year $40,000/year Net Benefit $10,000/year $-10,000/year Decision Get Married Do Not Remain Single Table 11 The Decision to Commit a Crime Commit Crime Do Not Commit Crime Marginal Utility $10,000 $5,000 Opportunity Cost $5,000 $10,000 Net Benefit $5,000 $-5,000 Decision Commit Crime

23 Marginal Utility OTHER DECISIONS (CONT.) Table 12 The Decision to Receive Public Assistance Receive Assistance $500/month Do Not Receive Assistance $0/month + $700/month (nonpecuniary benefits) Opportunity Cost $700/month $500/year Net Benefit $-200/month $200/year Decision Do Not Receive Assistance Table 13 A Politician s Decision to Support a Popular Bill Support Bill Do Not Support Bill Marginal Utility 1,000,000 votes 850,000 votes Opportunity Cost 850,000 votes 1,000,000 votes Net Benefit 150,000 votes -150,000 votes Support Bill