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Economists have long known that there are often disparities between what a consumer would be willing to pay to purchase a good he has yet to own versus how much he would be willing to accept to part with that same good.  Here is a simple example. Imagine you purchased a delicious box of processed mac and cheese (until that is banned too) for $0.99. You take it home with you. Now, what kind of a price would you sell that box for?

I might be unusual in how I answer, but depending on the circumstance, I would sell if for anything over $0.01. When I survey students I typically get answers closer to $2. Their response mimics what we observe more widely in the data. So here’s the puzzle (and some view this as a problem, I do not): is a box of macaroni and cheese “worth” $1 or $2? How can it be worth two different things?

Now, some economists fall all over themselves trying to posit explanations for this. Some argue that people are simply irrational. Some argue that “wealth” effects matter – that people who currently own the box are actually richer while those who do not are poorer and hence have trouble “affording” it. Others argue for endowment effects. Having the object itself makes the object more valuable – due to things like option values. I don’t want to go into the litany of other explanations. Many do have merit. But even if they do have merit for some goods (e.g. ask how much you’d be willing to pay to stop someone from polluting your pond versus what you’d be willing to accept to have someone pollute your pond) – these explanations should not be permitted to have us overlook the economic fundamentals first.

And just what fundamentals apply to our box of Mac and Cheese?

  1. The good in question is NOT “mac and cheese.” I suppose some of the explanations above touch at this. But a good comprises the full range of experience of that good, and therefore the “value” of it is entirely subjective. Surely even your own WTP is not the same for the same good at all times. A cool drink is worth more to you in mid-summer after a round of golf than it is in midwinter after a cup of cocoa. Same for mac and cheese, so to make the pricing puzzle truly a puzzle we’d actually have to figure out a way to make the good “having a box of mac and cheese” look identical to the good “not having a box of mac and cheese” which of course is nearly impossible to do.
  2. Transactions costs matter. Imagine that you purchased your $0.99 mac and cheese on a trip to the store you had already planned. The extra effort to walk over from the cereal aisle to the boxed foods aisle is small, as is the extra time you have to spend checking it out, bagging it and unpacking it. However, now we think about reselling that mac and cheese, and suddenly the transactions costs are much higher – we don’t put ourselves in the mental frame of mind of selling it back under the very circumstances that it was purchased. So, while that “mac and cheese” may have cost you $0.99 the first time around at the store (or actually something a little more) the real cost of the “mac and cheese” you own is much more.

There are other benefits and costs involved that would alter this analysis, but since I don’t get paid by the word I think I will stop here!

7 Responses to “What Exactly IS a Box of Mac and Cheese Worth?”

  1. sherlock says:

    How much are you willing to accept to STOP writing?

  2. blink says:

    Wait… so framing effects (“we don’t put ourselves in the mental frame…”) are now are now “fundamental economics”? What happened to rational choice? If we sell that mac-and-cheese, the high-transaction cost scenario of interrupting our day to go to the store and buy another sets a (high) upper-bound. Alternatively, we can wait a few days until we would have been at the store anyway (low transaction costs scenario). Here, we forego the option of consuming or selling this particular box of mac-and-cheese during those intervening days. It is reasonable to think this option value is not terribly high, for otherwise we would have purchased more boxes the last time we were at the store.

    Yes, transaction costs should be considered but fundamental economics does not posit that our mental state matters.

  3. wintercow20 says:

    Hi Blink, I hope my sarcasm is a bit clearer. There is a wave of people who are accepting the idea that “rational choice” economics is not so fundamental. I do, of course, vigorously disagree with them and lament the current popularity of behavioralism – not because its observations are uninteresting or wrong, but rather the way these observations are employed by supporters.

  4. cmprostreet says:

    For your students, they would likely consider the good sold as “mac and cheese RIGHT NOW,” the value of which would be mostly convenience (and the option value):

    Consider the transaction cost of making a trip all the way to the corner store just to get some mac and cheese (students are less likely to have a normal grocery-shopping trip already lined up). If the corner store is open at the time of the inter-student sale, then the amount above the corner store price for which it sells is a measure of the cost of a trip to the corner store.

    Corollary: If a student sells mac and cheese to another student when the corner store is open (and assumed to have the item in stock), then the student who purchases the mac and cheese has the higher cost of going to the corner store. The question isn’t about the value of the mac and cheese, it’s about who is the low-cost provider of trips to the corner store. The good bought isn’t just mac and cheese, it’s the ability to acquire mac and cheese while playing Halo.

    You could test this by seeing if mac and cheese sells for a higher price in Phase (sp?) than it does on the quad, and whether the price is higher still when the corner store is closed (to capture extra option value). Could make for a fun project.

    This effect would be easier to see with cigarettes, for which the store is always open but is even less convenient to get to.

  5. Philip says:

    Isn’t the difference between what I pay for the box of mac and cheese and the what I would sell it for my consumer surplus? I might of only paid 99 cents for the box, but I was willing to pay $2.

  6. Rod says:

    One of the most successful business enterprises I have known in my long life was the “sandwich man” business that flowered in my freshman year of college. Imagination, a great product and an understanding of basic psychology came together perfectly.

    Sandwich man was a business started by John Banghart, who had flunked out of my college three years earlier and who had spent three years in the Marine Corps gathering motivation for success in college and in life. He put himself through college, and Sandwich Man contributed heartily to that effort.

    John first tried the idea out on a small scale. Every night at exactly the same time, he’d bring sandwiches, doughnuts and drinks to a given dorm floor, and he’d yell, “sandwich man” down the hall. After just three or four days, he had us salivating like Pavlov’s dogs at just the sound of him opening the hallway door. We’d run down the hall to be first in line so we’d get the item we liked most — a powdered doughnut or a ham sandwich, whatever. And the prices were no greater than the prices at the campus snack bar. We did not feel he was taking advantage of us: he was our mother, our cookies and milk.

    In a short while, John hired his customers to be sandwich men, and he hired others to make sandwiches and make the run to Cumberland Farms to get day-old doughnuts and low-priced milk and sodas. He needed lots of help so he could assure all of his customers that the sandwich man would arrive on time in the middle of the evening study period, around nine.

    I don’t know whether the city board of health knew about the sandwich man concession. No one got sick.

    Then around his senior year he sold the business to another student for much more than a year’s tuition. And why would he NOT know how to run a business? He was an [trumpet fanfare] economics major!

    A few other students tried to compete, but for one reason or another they did not cut into the Original sandwich man franchise. The sandwich man was always on time.

    Also when I was in college, my brother spent a summer selling Good Humor ice cream. Again, timeliness was one of the keys to his success: he had little kids conditioned to have their dimes ready at the same time every day. When he rang his bell, they salivated and ran to his truck, ready to place an order.

    I bet they don’t do better than this in business school.

  7. Rod says:

    Sometimes ordinary events veer into the philosophical realm. Consider the commercial for A1 Steak Sauce a while back. The voice-over asks, “What is hamburger? Chopped ham? No, it’s chopped steak,and what better on chopped steak than A1?

    The same line of inquiry pertains to the Mac and Cheese value question: what is Mac and Cheese? Wittgenstein would ask a more fundamental question: what is Mac-ness and Cheese-ness? That powdered gunk Kraft wants you to mix with the pasta in the box sure does not look like cheese or even a sense-impression of cheese. It has yellowness, but very little cheese-ness. Store-brand mac and cheese looks a lot like Kraft mac and cheese, so one might ask if the sense impressions of store-brand items are the same as national brand items and thus deserve the same “label,” which could or could not be the price of 99 cents, or even $1.99, if Ben Bernanke gooses the money supply a little more.

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