Economics logic question- now with the answer

[Benjamin Frank]

I asked a similar question to this on my economics exams, but unfortunately there were a couple other answers than the one I was looking for. In this case, I think there is only one plausible answer.

U-Haul trucks have rear view mirrors inside the truck even though the only thing that can be seen out of this rear view mirror is the front of the storage container. I'm not referring to long haul trucks (or maybe even short haul trucks) where the container can be removed, but simply to U-Haul type trucks.

This is how I started the question "using the concepts in manufacturing discussed in class" (the Theory of the Firm) why do U-Haul (type) trucks have a rear view mirror inside the truck?

[Benjamin Frank]

Answer

The key to this is that manufacturing a rear view mirror is cheap.

So, rather than having two separate truck assembly lines, which means retooling the plant and creating ineffeciencies, it's cheaper to simply have one assembly line and put unnecessary rear view mirrors inside the U-Haul type trucks.

There are any number of lessons one can take from this, but the two I take are:
1.Some concepts in economics show that things that seem to make no sense are rational.

2.There are limits to choices. If a person wants a U-Haul type truck made without a rear view mirror, it would require a limited production run and the person would have to pay (much?) more despite getting one less part.

[Benjamin Frank]

The question that I asked my students was taken from a book: Why do 24 hours stores have doors with locks?

The answer I was looking for was the same: it's cheaper to manufacture all doors with locks than to make a limited production run for a relative handful of doors to be put in storefronts without locks.

However, even though I said that the answer needed to be based on concepts of manufacturing, many of the answers were either:

1.The door was put in place before the storefront was rented out to a 24 hour store. That shifts the 'manufacturing' from the door to the building, but makes sense as well (as does, the building might later be rented out to a non 24 hour store.)

2.Even 24 hour stores might close due to emergencies/theft. This is a stretch from a manufacturing perspective, but I gave it half marks because it was a common answer and it is a logical reason.

[LostFellow]

What class do you teach? These themes seem very non-mathematical for a college econ class. i.e. I don't feel strongly confident agreeing with your statements unless we have actual figures showing that the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs, and that the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves.

I would prima facie agree with such a supposition, but wouldn't say that this is a logical truth in any way unless presented both the mathematical facts along with assumptions of firm behavior.

[Benjamin Frank]

What class do you teach? These themes seem very non-mathematical for a college econ class. i.e. I don't feel strongly confident agreeing with your statements unless we have actual figures showing that the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs, and that the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves.

I would prima facie agree with such a supposition, but wouldn't say that this is a logical truth in any way unless presented both the mathematical facts along with assumptions of firm behavior.

I taught a class called Concepts in Economics at an advanced private/non profit high school, along with history (I often combined teaching the history class with the economics class.)

I'd have more sympathy for your point if the mathematics used in college economics classes were more often based on actual data and not simply made up numbers for the class to crunch.

I recognize that there are concepts in economics that can only be taught with mathematics, but I, and many other academic economists also believe that heavy emphasis on math often clouds the core economics concepts (though certainly about 50% of college economics graduates are very good/excellent at both.) Of course, this is one of the endless debates in academic economics.

There were studies around 15-20 years ago that showed about 50% of economics graduates couldn't answer fairly basic questions related to economics concepts.

However, if you think there is a lack of rigour in economics without mathematics, I need to find the book that I originally got the question from. It was published I believe in 2006 by some libertarian/right wing group, but even though it used arithmetic no more complicated than at the 8th grade level, the way it combined qualitative concepts in economics sometimes was so complex that it even made my head spin.

[LostFellow]

What class do you teach? These themes seem very non-mathematical for a college econ class. i.e. I don't feel strongly confident agreeing with your statements unless we have actual figures showing that the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs, and that the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves.

I would prima facie agree with such a supposition, but wouldn't say that this is a logical truth in any way unless presented both the mathematical facts along with assumptions of firm behavior.

I taught a class called Concepts in Economics at an advanced private/non profit high school, along with history (I often combined teaching the history class with the economics class.)

I'd have more sympathy for your point if the mathematics used in college economics classes were more often based on actual data and not simply made up numbers for the class to crunch.

I recognize that there are concepts in economics that can only be taught with mathematics, but I, and many other academic economists also believe that heavy emphasis on math often clouds the core economics concepts (though certainly about 50% of college economics graduates are very good/excellent at both.) Of course, this is one of the endless debates in academic economics.

There were studies around 15-20 years ago that showed about 50% of economics graduates couldn't answer fairly basic questions related to economics concepts.

However, if you think there is a lack of rigour in economics without mathematics, I need to find the book that I originally got the question from. It was published I believe in 2006 by some libertarian/right wing group, but even though it used arithmetic no more complicated than at the 8th grade level, the way it combined qualitative concepts in economics sometimes was so complex that it even made my head spin.

I'm well aware and glad of the modern trend in economics toward empiricism, and I am personally a fervent advocate of such successes in international development by economists like Nobel laureates Kremer, Duflo, and Banerjee. All I wanted to say is that these empirics are still derived on quantifiable measurements, e.g. a randomized control trial shows that all forms of cash transfer to parents/guardians in Mexico are pretty much equivalent in the vast majority of cash being directly used to pay for secondary school.

Maybe I was missing some context, but the example on trucks you provided do not seem to state the necessary assumptions that:

• the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs
• the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves

Perhaps you zero'd in on my usage of "mathematics" when I really just meant sufficient assumptions and basic quantitative reasoning; it would be unfair to assume the above two points without any quantitative evidence.

[Benjamin Frank]

What class do you teach? These themes seem very non-mathematical for a college econ class. i.e. I don't feel strongly confident agreeing with your statements unless we have actual figures showing that the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs, and that the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves.

I would prima facie agree with such a supposition, but wouldn't say that this is a logical truth in any way unless presented both the mathematical facts along with assumptions of firm behavior.

I taught a class called Concepts in Economics at an advanced private/non profit high school, along with history (I often combined teaching the history class with the economics class.)

I'd have more sympathy for your point if the mathematics used in college economics classes were more often based on actual data and not simply made up numbers for the class to crunch.

I recognize that there are concepts in economics that can only be taught with mathematics, but I, and many other academic economists also believe that heavy emphasis on math often clouds the core economics concepts (though certainly about 50% of college economics graduates are very good/excellent at both.) Of course, this is one of the endless debates in academic economics.

There were studies around 15-20 years ago that showed about 50% of economics graduates couldn't answer fairly basic questions related to economics concepts.

However, if you think there is a lack of rigour in economics without mathematics, I need to find the book that I originally got the question from. It was published I believe in 2006 by some libertarian/right wing group, but even though it used arithmetic no more complicated than at the 8th grade level, the way it combined qualitative concepts in economics sometimes was so complex that it even made my head spin.

I'm well aware and glad of the modern trend in economics toward empiricism, and I am personally a fervent advocate of such successes in international development by economists like Nobel laureates Kremer, Duflo, and Banerjee. All I wanted to say is that these empirics are still derived on quantifiable measurements, e.g. a randomized control trial shows that all forms of cash transfer to parents/guardians in Mexico are pretty much equivalent in the vast majority of cash being directly used to pay for secondary school.

Maybe I was missing some context, but the example on trucks you provided do not seem to state the necessary assumptions that:

• the vast majority of U-haul trucks do come from plants also designed to manufacture trucks with detachable cabs
• the cost of removing the rear-view mirror part from the assembly line is greater than the costs of the mirrors themselves

Perhaps you zero'd in on my usage of "mathematics" when I really just meant sufficient assumptions and basic quantitative reasoning; it would be unfair to assume the above two points without any quantitative evidence.

I appreciate that. One of the purposes of teaching economics concepts, to encourage people to 'think like an economist', is to increase and refine the ability of people to make reasonable assumptions. So, having the actual data isn't as important as the ability to make observations and then to make logical assumptions about the observed evidence based on rational concepts.

I appreciate that encouraging people to 'think like an economist' is related to the original definition of 'neo liberalism', but I think it's the case that the vast majority of time it leads to the 'right answer' when matched with empirical data.

This is especially the case given that much of the time empirical data isn't available because it's either not prepared or it's proprietary.

I also agree that for a long time, assumptions behind economic concepts were pure assumptions without any empirical data or even much observation and these pure assumptions often tended to benefit the wealthy and/or the powerful. One can see many of these pure 'right wing economics' assumptions in things like Richard Posner's legal writings or still in Mankiw's economics textbook.

[Benjamin Frank]

I found the book. It's called The Economics Naturalist: Why Economics Explains Almost Everything by Robert Frank (no relation.) (2008)

This book was published in 2008 and like all good knockoffs it followed on the conceptual economics books of the mid 2000s of Freakonomics by economics professor Steven Levitt and journalist Stephen Dubner, and the British Book The Undercover Economist by Financial Times economics journalist Tim Harford (who had for years previously written for the Financial Times under the name The Undercover Economist.)

As a good British Columbian though I have to mention that as far as I know the first book using or explaining economics concepts to non economists was called Thinking Economically written by UBC professor Maurice Levi and published in 1985.

I said the Robert Frank book was written by or for some right wing libertarian economics group, but although I believe F.E.E recommended the book, Robert Frank has no connection to them or to any other right wing/libertrarian economics organization.

The book, however, does indeed argue that using economics concepts logically, a person can explain observations that might seem odd or counterintuitive without needing actual data, either empirical or otherwise. Frank acknowledges the explanation derived might be incorrect, but most of the time they are likely correct.

These are his answers to questions from students or answers from other economists in research papers.

On the front of the book in a drawing of a milk carton are four questions: "Why is milk sold in rectangular containers while soft drinks are sold in cylindrical ones?" as well as "Why do 24 hour shops have locks on their doors?"

This was a question from students Leanna Beck and Ebony Johnson
Full question: Many convenience stores are open 24 hours a day, 365 days a week. Since they never lock their doors, why do they bother to install doors with locks on them?

Answer: It is always possible of course, that an emergency could force such a store to close at least briefly. In the wake of the summer floods of 2007 in England, for example, residents of many towns were forced to evacuate with little notice. And needless to say, an unlocked store with no employees on site becomes a sitting duck for looters.

But even if the possibility of closing could be ruled out with certainty, it is doubtful that a store would find it advantageous to purchase doors without locks.

The vast majority of industrial doors are sold to establishments that are not open 24 hours a day. These establishments have obvious reasons for wanting locks on their doors. So, given that most industrial doors are sold with locks, it is probably cheaper to make all doors the same way, just as it is cheaper to put Braille dots on all cashpoint keypads, even those destined for drive-up machines.

[Meclazine for Israel]

Why don't Dodge (Ram's in particular) make right hand drive trucks for the Australian market?

[Benjamin Frank]

Why don't Dodge (Ram's in particular) make right hand drive trucks for the Australian market?

It's either cheaper to convert them (not likely) or they want to make sure that their market in Australia is not just short term before committing to make right hand drive trucks. This is a behavioral economics concept referred to as 'loss aversion.'

Ram Is Doing So Well In Australia That It's Exploring ...
Carscoops
https://www.carscoops.com › news
Apr 6, 2023 — Ram currently converts trucks to right-hand drive once they arrive in Australia, but may look to simplify the process in the future.

The book I referred to largely leaves out behavioral economics concepts which is a valid criticism of the book.

However, for instance...

There was a saying from about 100 years ago "if you build a better mousetrap the world will beat a path to your door."

The accurate phrase here is "If you build even a significantly better mousetrap but people are satisfied with current mousetraps nobody will care."

The reason for this is due to the twin related concepts of loss aversion/inertia and how, again, what seems to be irrational is actually a rational decision. A somewhat better mousetrap might be entirely different than present mousestraps, so learning to use this somewhat better mousetrap requires time, which is an opportunity cost tradeoff.

A somewhat better mousetrap that is similar to current mousetraps won't interest people if people are satisfied with the mousetraps they have due to the financial cost.

Only a significantly better mousetrap that is similar to currect mousetraps might be a success, but, then on the supply side, it's unlikely anybody will put the time and money into developing one due to the difficulty of significantly improving on the current design (inertia) and the uncertainty of interesting people (loss aversion.)

So, in this case, RAM likely just wants to know that its trucks will likely be popular long enough into the future to justify building a manufacturing facility for them.

There is one other possibility too:

Since this is a straight out investment decision for Stelantis (RAM) businesses make investment decisions like these using finance calculation decisions like 'payback periods.'

First, it takes time especially for a large business to decide on these things, second this is an internal competition in the company, with different divisions competing for investment dollars from head office. So, even if it costs more to convert them than it would to operate a manufacturing plant, it's entirely possible the CEO will say "We can make more doing X, it's not a big cost or a bid deal otherwise to convert them."

I'm sure this is the reason: it's an investment decision that takes time to make and it has to compete against other possible investments.

However, if I had just said that right away, I couldn't have brought up inertia and loss aversion.

[Benjamin Frank]

Also, even if you ultimately think that empirical economics is more useful (damn quants), don't you find this more interesting than say Lorenz curves?

 The paper surveys various parametric Lorenz curves to be fitted to grouped income data in order to obtain an estimate for the Gini measure of inequality.

BORING

[oldtimer]

Also, even if you ultimately think that empirical economics is more useful (damn quants), don't you find this more interesting than say Lorenz curves?

 The paper surveys various parametric Lorenz curves to be fitted to grouped income data in order to obtain an estimate for the Gini measure of inequality.

BORING

Ok let me ask you an economics logic question:

Why can prices rise after interest rates rise ?

[Benjamin Frank]

Also, even if you ultimately think that empirical economics is more useful (damn quants), don't you find this more interesting than say Lorenz curves?

 The paper surveys various parametric Lorenz curves to be fitted to grouped income data in order to obtain an estimate for the Gini measure of inequality.

BORING

Ok let me ask you an economics logic question:

Why can prices rise after interest rates rise ?

If you are asking about a direct connection, it's because depending on what is included in the basket of goods that measure inflation, if mortgage interest is part of that basket, then when interest rates rise, as the mortgages roll over, the inflation rate includes the rise in mortgage interest caused by the rise in interest rates.

[oldtimer]

Also, even if you ultimately think that empirical economics is more useful (damn quants), don't you find this more interesting than say Lorenz curves?

 The paper surveys various parametric Lorenz curves to be fitted to grouped income data in order to obtain an estimate for the Gini measure of inequality.

BORING

Ok let me ask you an economics logic question:

Why can prices rise after interest rates rise ?

If you are asking about a direct connection, it's because depending on what is included in the basket of goods that measure inflation, if mortgage interest is part of that basket, then when interest rates rise, as the mortgages roll over, the inflation rate includes the rise in mortgage interest caused by the rise in interest rates.

Close.

What happened in Greece is that as the money banks demand rose to 44 billion in annual interest payments due to higher rates on loans last year, the private economy responded by raising prices in order to cover their increased loan payments.

Servicing a loan is a business expenditure, an increase in interest rates results in increased costs for a business to run, costs rise = prices rise.