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Here’s the solution to last week’s problem:

Here’s the paper from my hero Gary Becker explaining the phenomena: A Note on Restaurant Pricing and Other Examples of Social Influences on Price

It is definitely a great read, and it actually was one of the papers that got me into realizing the “beauty” of economics. The answer is simple, but the model is beautiful.

And for those turned-off by economics, here is essentially what the paper said (and a lot of people who commented actually was right on!):

“In this note I provide a different explanation that assumes a consumer’s demand for some goods depends on the emands by other conusmers. The motivation for this approach is the recognition that restaurant eating, watching a game or play, attending a concert, or talking about books are all social activities where people consume a product or service together and partly in public.

Suppose that the pleasure from consuming a good is greater when many people want to–perhaps because a person does not which to be out of step with what is popular, or because confidence in the quality of the food, writing, or performance is greater when a restaurant, book, or theater is more popular. This attitude is consistent with Groucho Marx’s principle that he wouldn’t join any club that would accept him.”

Even if you got the intuitive answer, I hope you can check out Gary Becker’s models: the beauty of economics.

Anyways, for this week, here’s a really hard question that will really make you think:

An economist observed that people would need to have implausibly high levels of risk aversion to prefer the low yield of US government bonds to the much higher returns of US stocks. Yet US government bonds are still held by a good deal of investors. Can you explain this phenomena?

Hope you have fun thinking about it!