The Economics of Buying Stamps: How Many Stamps to Pickup at the Post Office

My friend Andy the other day e-mailed me to ask if I could tell him how many stamps to purchase given the relatively new forever stamp. For those of you not familiar you can purchase a stamp that will send one regular letter forever, instead of purchasing a set amount of postage. Currently the forever stamp is the same price as the 42 cent stamp used to send a letter. Several people have done analyses of the relationship between overall inflation and stamp prices. A look at this chart shows that the price of stamps grows with inflation, perhaps being out of line at certain points, but probably never more than 1 cent off.

So in short it probably does not make sense to purchase extra “forever” stamps to get ahead of inflation. But, I think there is still some analysis to be done. I will show you how to create a basic economic model to determine how many stamps to purchase. I will argue that you should purchase more stamps if the number of stamps in your wallet is less than the expected number of stamps you will use before your next expected trip to the post office. I believe the best solution is to purchase 20 stamps, unless you already have 20. If you are similar to me and send about 1 letter a month and go to the post office about every 6 months.

First, let us start with your endowment of stamps (S). As my wife points out you should carry them in your wallet, since your wallet is typically with you. Now suppose you have X letters to send over the next year. We will assume that you will send all your mail.

If you have more letters to mail than stamps X > S then you do not have enough stamps. So you must make an extra trip to the post office. We will call the pain that it is to get to the post office P. So if

X > S then your loss of happiness is P, the pain of going to the post office.

Now suppose S > X you have enough stamps. However for each additional stamp that you have there is the potential of losing that stamp and it at some point it will be annoying to have too many stamps in your wallet. Therefore if S > X, your happiness loss from not getting the right number of stamps is f(D), where f is a function of D the number of extra stamps.

I will assume that as long as the number of extra stamps is under 40 it is better than going to the post office again (I think I would rather always carry 40 stamps then go to the post office).

Now we could make the model more complex, since you do not know how many letters you will send or if you will need to go to the post office anyways to mail a package. But I think it boils down to for me, I send about one letter a month. So I should purchase a book of 20 stamps every time I’m at the post office, unless I have at least 20 already, since 40 stamps in my wallet isn't noticeable. Buying the 20 packet is easier, and they stay together in your wallet with more ease.

Sure I could buy fewer stamps, but the pain of me going to the post office (P), just does not make me want to take that chance.

American Economic Association Follows Basic Investment Advice

Recently a New York Times article came out with a simple investment strategy. “Index (mostly). Save a ton. Reallocate infrequently.”

What does that mean? Put your money in index mutual funds. Some well known indicies are the S&P 500 and the Dow Jones, these indices track the market by picking a group of major companies. Since the indices are pre-chosen management fees are small and few professional managers consistently do better than the major index funds.

Save a ton is obvious, while allocation is which indicies to put your money. You can do US (small or large companies), International, or bonds. So what is a good allocation? Depends on who you are.

A good indicator might be how experts invest their money. So how about the American Economic Association? They recently reallocated their portfolio to a mix of 15% bonds, 55% US Stocks, and 30% international of which 5% is emerging markets (article here). All held with Vanguard, and I think most are index funds.

That is not too far off my allocation of retirement funds, without the bonds.

Thanks to my grandfather for passing on the NY-Times article.

Perfect Competition and Ebay Sellers

In my intro to economics class, I teach my students a standard economic theory. That usually when anyone can sell something, then in the long run profits for a business will go to zero. These situations are called perfect competition.

I have often thought about perfect competition and Ebay. I would guess most (at least 90%) of the stuff sold on Ebay is not made by the person selling it. Since anyone in the US can pretty much sell stuff on Ebay, if there are profits to be made more people will start selling things on Ebay. When more people start to sell, the price of the good sold will generally fall until profits are zero.

Daniel Gross at Slate has an article today about how Ebay claims that 1.3 million people a year make their living off of Ebay and most of these people are in the US. Like Daniel Gross, I’m skeptical of this figure, it looks like the actual figure is referring to people who make their fist or secondary income from Ebay. What percentage of those people actually earn enough to live on from Ebay is hard to pin down.

In graduate school, I sold coins on Ebay for my father in law. I think the amount I made was something like 10% of my graduate school stipend. Having sold about 50 items on Ebay and not having to get my own merchandise, my guess is have to find just the right niche or have some special ability to find stuff at garage sales to make a living at Ebay.

What do Professors do with their summer?

So on Friday I finished my duties as a professor for the school year, save some grading. Sometimes people ask me what does a professor do with their summer “vacation”?

Like many professors as part of my tenure/promotion decision I’m expected to publish academic journal articles. Without teaching duties for 3.5 months, I have a lot time to dedicate to that. During the school year depending on the time in the semester I spend between 50% and 10% of my time on research. During the summer it is closer to 90%, with some time to develop courses for next year.

So how do I research? For the most part I work with pre-collected data sets. A few of the papers I’m working on use data from a program in Nicaragua that gave money to families if they sent their kids to school and got health care checkups. The data is freely available here. Another paper I’m working on involves minor league baseball attendance. In that case I had to pay for the data set. I spend time organizing the data and using statistical programs to test for various relationships between variables of interest. This part of the project I would say takes about 1/3 of the time.

Once you have results you can begin to write up the paper. Luckily, I have a cadre of great co-authors. Typically one person will write up a section, then another person will edit it. In some cases one person does a lot of the data work, so they write up the results and econometric (statistical) section, while the other writes the literature review. Typically, the junior colleague has a comparative advantage (that is they take longer to do it, but are less busy or slower at the other parts) in the statistical part, while the senior colleague has it in the introduction, literature review, and particularly editing. I play both roles depending on my co-authors. The initial write up along with the literature review takes about 1/3 of the time.

With the final 1/3 it is about editing and reediting. You present your paper at conferences or university seminars. You might have colleagues read the paper. Then you make changes, and more changes, and more changes. Then if you get enough positive feedback you send it to a journal. The journal gives it to 3-4 peers and the peers decide to accept, reject, or ask for revisions. The most common result is to reject or ask for revisions. Sometimes papers can go through 2-3 rounds of revisions, and reviewers can sometimes take a few or many months to get back to you. So sometimes you can’t work on your article for a few months, so it is best to have several projects going at once. I have five projects I plan on working on this summer, they are all at various stages.

One great thing about the summer is that I set my hours (although I typically work normal work hours) and I can work from anywhere I want.

So this summer I will be living in Palo Alto, California while my does a temporary work assignment all summer. So look for some Bay area related updates.

$240 worth of pudding.....awww yeah! The Pudding Index

 

MTV2 Legit - Full Episodes

So if you don't know anything about $240 worth of pudding watch the video first.

The video is from the State an MTV sketch comedy show from the mid 1990s. This skit was ranked #47 on the Nerve's list of best 50 comedy sketchs of all time.

Really this post will make no sense if you don't watch the video. It might not makes sense after, but just watch it.

It's time now for $240 worth of pudding......

One night my wife and I wondered how much pudding $240 would purchase. After seeing the video again, I thought how has that amount changed over time. The graph below shows the amount of pudding that could be purchased for $240 going back to 1950.
I used US government data on the price of a gallon of whole milk, plus 8 boxes of instant pudding mix per gallon. A box of instant pudding mix is assumed to cost $1.09 (based on field research at Safeway) and is indexed to the CPI. We also assume anyone who would make $240 worth of pudding would not think ahead to buy in bulk.

Currently $240 buys only 19 gallons worth of pudding, when the sketch came out in 1993 it bought almost 30. At my birth in 1980 $240 would have bought 50 gallons worth of pudding.

Still 19 gallons is a lot of pudding.... awww yeah!

Rational or Irrational Prices? Counting Coins at Chevy Chase Bank

So you the last couple of years, I have been putting my change is this cool piggy bank (). I wanted to turn in all my change and went into the Chevy Chase bank location in the Towson student union. I had seen they had a coin counter there, and I assumed maybe it was free for Towson University people. Ok I was wrong, but I would be willing to pay to have the coins counted.

But the pricing system was weird:
Count Under $5.00 of change free
Count $5-$100.00 …. Flat $3.00 charge
Count $100.01 or more 10% charge

I think I had about $150 in change. So I started feeding my change in and I got to $95 and then stopped. Why because that cost me only $3, so for $95 of change I received $92. If I put in the whole $150 it would have cost me $15. But if I go back tomorrow and put in the other $65 worth of change I get $62. So now I have paid only $6 to have my coins counted, instead of $15. But, I do have to go to the student union twice, so you have to figure in the opportunity cost of going back over.

So why would Chevy Chase set this type of fee structure? My guess is it to prevent people from coming with hundreds of dollars worth of change. Or perhaps they were hoping to get someone thinks: I have saved this change up for years, I don’t feel like making extra trips, I’ll just pay the larger fee.

In other words, my guess is that Chevy Chase thinks the average’s person opportunity cost for a second trip to the bank is at most $14 (the savings of doing two trips just under a $100).

I should note that the service is free to Chevy Chase customers, however I bank with an online only bank.

I think I should change my bank to First Citywide Change.

Mortgage Crisis Explained, This American Life Puts it all in Prospective

I have to admit I still did not quite understand how the mortgage crisis happened. It was really put into perspective last night when I listened to this week’s episode of This American Life, a public radio program. I really recommend listening to the whole thing (here). It’s an hour long but great!

To summarize. Within the last few years the amount of money around the world that is invested has double with a lot of it coming from exporting countries like China and oil producers. These countries were looking for decent but reasonably safe returns. US treasury bonds were not paying much, so someone figured out that people could buy up packages of mortgages. Sure some would default, but with enough of them the risk should even out. Soon the good packages of traditional mortgages were purchased, so the rules for mortgages changes. Instead of showing your tax return, to show you could pay your loan, you could just state your income and assets without verification, then mortgage brokers stopped asking for that. Not surprisingly if you don’t verify people’s income or don’t even ask you get a worse pool of borrowers.

Additionally, mortgage brokers lied to sell more loans, like one man whose paper work said he made almost 6 times more a year then he actually did. This is a classic economics problem if you offer a loan or insurance you are more likely to get the people who can’t repay or will need to use the insurance.

The other problem was computer models underestimated the amount of people under the non-income verifying that would default. The underlying problems now are that international investors are afraid of a variety investment. Also that as these mortgages were resold now thousands of people own each mortgage, since they were sliced up, so there is no way to renegotiate things.

So be prepared to show your tax returns and pay stubs to buy a house.