High quality oranges and high quality hotels

My friend Ryan and his wife Abby recently took a break from their two young children and stayed in the Monterey area, going to a nice restaurant on Friday evening and staying at a luxury hotel that night. He told me they could have stayed at the Navy Lodge for about $100 but wanted to do it in style at the Clement Hotel in Canary Row for $400. I told him that he and Abby were demonstrating what we UCLA graduate students call the “Orange Principle.” Here is an explanation of that policy Universal Economics.

Good and Bad Grapes: A larger proportion of good quality California oranges and grapes are shipped to New York than the proportion in California. Are New Yorkers Richer or More Discriminatory? Perhaps—but poor districts in New York and throughout the East Coast also have higher quality ratios. The question may be raised for other products: Why are foreign cars and other “luxuries” disproportionately more expensive to export than to buy at home? Why do young parents spend a higher percentage of their evenings going to expensive plays instead of movies than young childless couples? Why are “seconds” (slightly defective products) consumed more at the point of production? Why do students attend colleges farther away than average? Why should a tourist be more cautious about buying leather goods in Italy than buying Italian exports in other countries? Why is most meat shipped to Alaska “deboned”?

The answers to these questions are based on the implication of the first law

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Table 9.1 Good quality is sent away
Price of grapes in New York = cost of transportation + price of grapes in California
Choice $1.50 = $50 + $1.00
Standard $1.00 = .50 + .50
Relative prices in New York Relative prices in California
1.5 for standard 1 choice 2 standard for 1 choice

demand , suppose California grapes cost 50¢ a pound to ship to New York, regardless of quality, and b) preferred grapes in California sell for $1 per pound and standard grapes for 50¢ per pound. Since the cost per unit is the same for either quality of shipping in New York, the price in New York is 50¢ higher than in California for both types. But in New York, consumers of choice grapes sacrifice only 1.5 pounds of standard, while in California, a pound of choice costs two pounds of standard.

New Yorkers’ favorite grape is cheap related to standard grapes, and therefore, by the first law of demand, they would demand a larger share of the choice grapes than the Californians. In California, where standard grapes are cheaper than in New York related to Preferred grapes, a larger fraction of standard grapes will be consumed. To understand this phenomenon we need not resort to assumptions about differences in “consumer tastes and preferences”.

A common effect of additional costs on related products is: a Adding a constant value from a high and a less The value will reduce the resulting ratio to the new value. High- and low-quality meat can cost between $10 and $5. Now, add $10 to each, which becomes $20 and $15. Even if both absolute prices increase equally, high quality meat becomes cheaper related to low quality; Or, conversely, low-quality becomes more expensive than high-quality. Previously, buying high-quality meat was equivalent to giving up twice as much low-quality meat. But, if $10 is added to both prices, the higher-end new price is lower relative From low quality – only 1.33 times more expensive than the price.

Hence the demand for high quality meat has increased relative The quantity demanded of lower-quality meat, while the price of each is increased by the same absolute amount. The percentage decrease in quantity demanded of low-quality meat is greater than that of high-quality. A large proportion of the total demand for meat is now high quality meat.

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Here’s how to apply it to Ryan and Abby.

There is a cost to caring for someone’s children: it can be a financial cost or a “favor” cost: someone has done them a favor and they owe that person a favor and even if they never repay the favor, they, as good people, Take account of the costs their friends bear and experience some of it yourself. And since they love their children, there is also a cost because their children will miss them and that counts in their cost calculations.

So let’s say the cost for someone to babysit overnight is $200.

If they had no children the relative value of Clement to Navy Lodge would be $400 to $100, or 4 to 1.

As they have children and the relative value of Clement to Navy Lodge is $600 to $300, or 2 to 1.

IS

I was telling Ryan about another application of the principle. In the 1980s, my mentor and editor fateDan Seligman, was writing a heavily researched article for fate On the gambling industry. Dan loved to gamble. He noticed an empirical regularity and called me out on it: people who had higher travel costs to Vegas (I think Dan went the distance, which is not a bad proxy for transportation costs) lost more per day than people with lower costs. go to vegas Although, as far as I know, he never read Alchian and Allen, he argued exactly the same way they did.

His question to me was: Does that principle have a name? Yes, I told him. This is called the “Orange Principle”. Needless to say, he was not entirely satisfied with my answer.

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