Crimes and Interest Rate (Part 1)

Crimes and Interest Rate (Part 1)

Empirical findings show that crime rate and interest rate are positively related. In other words, when interest rate is higher, crime rate will also be higher. These two variables seem unrelated, this phenomenon, however, can be explained by economics.

Interest rate as a discount factor

“One dollar today worth more than one dollar tomorrow”. This sentence is right given a positive interest rate. If you have one dollar, you can invest and get back one plus the interest tomorrow. The higher the interest rate, the more you get, and the more valuable the one dollar today.

With the similar manner, what if you owe your friend one dollar? Should you repay it today or tomorrow? The answer is clear, you should postpone your repayment as you can get more interest if you postpone. The higher the interest rate, the less you have to repay.

Therefore, the existence interest rate adds value for today’s benefits and diluting future costs. The higher the interest rate, the more “impatient” the people are.

Crimes as an impatient act

When a person committ crimes, he/she gets the present enjoyment. For example, burglary and robbery let you get certain amount of money to spend now; assault allows you express anger to those you hate; rape… well….

Of course, after you get the enjoyment, you have to pay the cost. Yet, punishment will be made in the future. Since interest rate is a discount factor, your real cost will be lower when the interest rate is higher.

In part 2, we will dig into data to see whether higher interest rate leads to higher crime rate. A story will become a theory if it is verified by data.  

[ECON4284] Tutorial 2

Note:
https://www.file-upload.com/zmg0mqtzrolb

For the last part, I dont know why I cannot upload the video. Just try to derive the answer by yourself. They are not hard. 

Why Barbecue Mix Combo is More Costly than Barbecue Regular?

Why Barbecue Mix Combo is More Costly than Barbecue Regular?

It is not uncommon to see that the price of barbecue mix combo with rice/noodle is more expensive than barbecue regular with rice/noodle. For instance, at HKUST LG1, barbecue pork with rice is $22 while barbecue pork mix soy sauce chicken with rice is $25. Many people tried to use the concept of diminishing marginal benefit, diminishing marginal utility or diminishing marginal use value, etc. to explain this phenomenon. These explanations, however, have missed one crucial condition. In this article, I will give a full explanation for the case that a combo is more expensive than a solo.

The Condition of Diminishing Marginal Utility

Many people use diminishing marginal utility to explain this phenomenon. When a consume keep buying the certain good, the additional utility (or benefit) will decrease. Picture that, what do you feel for the first bite of your barbecue pork when you just finished the 8-hour lectures? You definitely feel very dim and very ecstasy. Then, what do you feel when you are eating the tenth bowl of barbecue pork with rice? You will think that they are shit. Therefore, if you have more variety of choices, the diminishing marginal utility of each component is smaller. Thus, the aggregate of your satisfaction is larger. As a result, you are willing to pay a higher price. This is convincing, isn’t it?

The Missing Condition: The Combination Have to be Complement

Well, if you tried to add some milk into a cup lemon tea, I guess no one is willing to pay a higher price for this combo than just a cup of lemon tea or just a cup of milk. The reason why the combo can be sold at a higher price, or why consumers are willing to pay a higher price for the combo, is that the combo are complementary to each other. Tofu is complementary to roasted pork, thus consumers are willing to pay a higher price for braised tofu with roast pork. Lemon tea and milk are not complementary to each other. Consumers will not pay a higher price even if they exist diminishing marginal utility.

如夢？如花？Adverse Selection and Online Dating

如夢？如花？Adverse Selection and Online Dating

Many people (in HKUST) in the society nowadays find it difficult to find a girlfriend / boyfriend. As a result, many of them resort to online dating in order to complete their dream. Unfortunately, many people complain that the quality of their dating partner is much lower than their expectation. Worse still, some unscrupulous liars make use of the dating platform to scam people’s wealth. The reason behind is that adverse selection is inherent in these types of dating platforms.

What is Adverse Selection?

Adverse Selection is one the most crucial concepts in Economics. Professor George Akerlof introduced the concept of Adverse Selection in 1970. The story is that due to asymmetric information between buyers and sellers, buyers cannot distinguish the quality of the products. Therefore, buyers will pay for the average price of the high quality products and low quality products. Sellers of high quality products will leave the market if the average price is lower than their cost. As a result, only low quality products are left in the market. The low quality products (which is called lemons) repel the high quality products (which is called peaches).

Applications of Adverse Selection

Adverse Selection can be found in many cases. For example, in the insurance market, insurance companies cannot distinguish between high-risk insures and low-risk insures. Therefore, insurance companies will set the premium equals to their expected cost (probably with a mark-up). In this case, the low-risk insures will think the premium be too expensive and reject the offer. As a result, only high-risk insurers will buy the insurance.

Another example is in the car market. The buyers do not want whether the car is a peach or a lemon. Thus, buyers will place the average price between a peach and a lemon when they are offered a car. When this price is lower than the value of a peach seller, the peach seller will leave the market. Eventually, only lemons are left in the market.

Adverse Selection in Online Dating

The adverse selection problem is that many of the dating prospects are lemons. In other words, the quality of clients tends to be lower than expected. You thought that your prospect is如夢, but eventually you meet up with 如花.

This is an inherent problem due to asymmetric information. First, people are free to manipulate their information at the online platforms. In order to achieve their goals (to get a partner or to cheat money), the dating prospects would try to exaggerate their types, such as claiming that they are 1.8meters high, having several properties, making $50,000 per month, or even be able to swim to international waters easily by just using single hand and battling with sharks, and blocking hailstorm by single arm. Thus, quality is lower than expected.

Second, people participating in online dating are the lemons in real life. If they are not the lemons, they are able to find their partner in traditional way and do not need to rely on online platforms. Therefore, only the losers and scammers would like to join the online dating platforms.

How can the Adverse Selection be mitigated? You might try to think about it and leave the comments.