8.5: Putting It Together- Utility

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The key underlying principle in this module was getting the biggest bang for the buck. This principle will be used over and over again in different contexts in this text, and the results will sometimes surprise you.

Making Choices During the Recession

Remember the question posed at the beginning of this module—in what category did consumers worldwide increase their spending during the recession? The answer is higher education. According to the United Nations Educational, Scientific, and Cultural Organization (UNESCO), enrollment in colleges and universities rose one-third in China and almost two-thirds in Saudi Arabia, nearly doubled in Pakistan, tripled in Uganda, and surged by three million—18 percent—in the United States. Why were consumers willing to spend on education during lean times? Both individuals and countries view higher education as the way to prosperity. Many feel that increased earnings are a significant benefit of attending college.

Bureau of Labor Statistics data from May 2012 supports this view, as shown in Figure 3. They show a positive correlation between earnings and education. The data also indicate that unemployment rates fall with higher levels of education and training.

The graph shows the unemployment rate and median weekly earnings in 2012 for various levels of education. People with professional degrees made around $1,735 a week and suffered a 2.1% unemployment rate. People with doctoral degrees made around $1,624 a week and suffered a 2.5% unemployment rate. People with Master’s degrees made around $1,300 a week and suffered a 3.5% unemployment rate. People with Bachelor’s degrees made around $1,066 a week and suffered a 4.5% unemployment rate. People with Associate’s degrees made around $785 a week and suffered a 6.2% unemployment rate. People with some college, no degree made around $727 a week and suffered a 7.7% unemployment rate. People with a high school diploma made around $652 a week and suffered an 8.3% unemployment rate. People with less than a high school diploma made around $471 a week and suffered a 12.4% unemployment rate.

Figure 1. The Impact of Education on Earnings and Unemployment Rates, 2012. Those with the highest degrees in 2012 had substantially lower unemployment rates whereas those with the least formal education suffered from the highest unemployment rates. The national median average weekly income was $815, and the nation unemployment average in 2012 was 6.8%. (Source: Bureau of Labor Statistics, May 22, 2013)

Remember the other example we posed at the beginning of the module–what would be the better strategy for maximizing your GPA? To keep it simple, let us suppose you are only taking two courses, an “easy” course, and a “hard” course, where the difficulty is defined by how much time and effort it takes to earn a given grade. Is Principles of Microeconomics an easy course or a hard one for you? What about Biology? You get to decide which of your courses falls into each category. Using this example, many people think that it makes the most sense to spend the most time and effort on the hard course. After all, a hard course requires more time to learn, right?

That’s true, but if you think like an economist, you’ll see that to maximize your GPA, given a limited amount of study time, it makes more sense to start with the course where your study time will have the most impact on your grades, the biggest bang for the buck. In other words, you should start with the easy course and quite possibly spend more time on it, to assure yourself of an A.

This is no different than choosing to spend more of your budget on the product that gives you the most marginal utility per dollar spent. It both cases, you make the most of your scarce resources–budget dollars in the consumption case and study hours in the GPA case.

As you proceed through the rest of this text, look for opportunities to apply the biggest bang for the buck principle.

Putting It Together: Utility. Authored by: Steven Greenlaw and Lumen Learning. License: CC BY: Attribution