Answers I wish I saw ...

After reviewing my class's mediocre test results, I fell into a deep depression (no blogging since last Thursday). I broke out of my funk when I realized the test was more than fair: most of the questions were word-for-word from the chapter questions I assigned. I provide the answers online and they are taken up in tutorial each week ... o'wait, no one goes to tutorial, right. So, my first midterm fit the desired curve, albeit a little skewed to the bottom.

Here are some creative answers I wish I saw while marking these exams (I so would have awarded marks for funny!).

Life Lesson 1: buying food

At about 9pm last night, Emily (my sister) and I went learn about unit prices. Trying to teach this concept is easier in Nova Scotia since the price tags include the cost per gram/bl/oz/etc. For this second year fine art student - with a "grab-the-nicest-picture-I-see" method of buying - , I was excited to pass-on my mad shopping tricks.

Apples: buy them individually or in a bag? The cost per apple when bought individually is $1.99bl. Cost per 4 bl bag is $3.99. Assuming these apples are both the same in taste: Unit Price Man say: buying in a bag is half the cost of buying them one by one.

A complication: what if you cannot eat a whole bag, which means some might go bad? Or in other words, how much of the bag would you need to throw away before it was better to only buy a few? Answer: half the bag would have to go rotten to buy them individually. Suggestion: learn to make apple pies!

Another example: fresh chicken - bone in or out, skin on or off, thighs or breast, which brand? Each of these preferences will determine the price. How do I know what is best? Let's take one example: bone in or bone out? Looking at a single brand of chicken (say Maple Leaf), look at the unit price of the boneless/skinless chicken which costs $17.89kg. Then find the price of the skinless bone-in chicken: $11.89kg. Assuming the bone weights nothing (just say), the price you pay for someone else to remove the bone is $6 per kg. So, the question you need to ask yourself is: is the $6kg worth it or should I remove the bone myself? For the starving student: get out the knife and save that cash (Note: even though the bone does weight something it is much less then 1/3 of the weight).

Shopping will never be the same. Feel free share your shopping tips.

"Trust Me, I'm an Economist"

Economists is rising in popularity! Enrollment numbers in economics have recovered from their early 1990s fall (news story here) and books like "Freakonomics" and (the lesser known) "The Undercover Econmist" are feeding those hungry for economic knowledge that is useful to them.

Freakonomics: it punched hard, hit a soft spot, and make no apoligies: "If morality represents how we would like the world to work, then economics represents how it actually does work". It screamed at real estate agents, explained why drug dealers live with their mom, claimed that public programs had nothing to do with lower crime rates, and even asked you to notice the ritzy headphones on the kid asking for your change. If this is too hardcore for your liking, I have an alternative.

Tim Harford has put three clips from "Trust Me, I'm an Economist" (airing on the BBC in August) on YouTube. Each of these less then 3 minute clips are worth seeing! Here is the link to all three clips: (my labels: Ask an Economist, The Used Car Market, Stock Tips and other Lies".

Another great line from Tim Harford: "If you pay 10 euros a day to protect yourself from a 900 euro excess, then that's fair if you crash into something every 90 days. Of course, if your driving is that bad or the roads are that dangerous, you should probably walk instead."

Questions, please. Trust me. I have no incentives to lie. I am not selling you anything (I don't have ads on my blog).

RRSPs: borrowing to invest

Motivated by madjenny's and false phophet's questions/comments, I have decided to do second (shorter) posting on RRSPs.

Two fun questions: bi-weekly payments or borrowing with bi-weekly payments? where should I put my money?

Answer 1: an example ...

Choice One: If you make bi-weekly payments (26 a year) of $38.46 you will have saved $1000 over the year, and (assuming a 7% return) you have made almost $35 in interest. From your 2007 tax return, so you will earn (assuming you live in Ontario, with a $40K income) $310 dollars from CCRA.

Choice Two: If you borrow $1000 today and make your RRSP contribution before March 1st, your contribution is tax deductible. So you will earn $310 dollars on this year's tax refund, and you will gain interest (again assuming 7% return) is $70 over the next 12 months. The only cost to borrowing is the interest charges (at 6% is roughly $33). You can make the same bi-weekly payments as in Choice One plus an extra $1.30 to cover the interest cost. And if you put your $310 tax refund into your RRSP, you can get the tax refund for it in 2007 tax year (another $91 in your pocket or RRSP) and the interest you get on the extra $310 in your RRSP over the next year (about $20 in earnings).

So the difference between bi-weekly contributions and borrowing to invest is not insignificant. Of course, this holds interest rates and returns constant to make life simple, but you get the point.
Here is a Marginal Tax Rate Calculator

As for the second question:

Nothing is more valuable than great broker who spends their whole day doing research on companies that you should invest in. Because a mutual fund is "a basket of assets", the risk is lower than holding an individual stocks, and fund managers probably are the right people to be choosing what stocks to by in a given industry. I think they're great, but a broker is need to help pick the good ones.

I hope that was helpful and interesting!

POLLING ALL READERS!

Test day is Thursday. The first of two midterms. For the first time, I might get to see all 25 students in my class (well, maybe).

HERE IS THE NEWS: so far, now only days before the midterm, NOT ONE student has gone to tutorial. I am totally shocked. No one.

So, let's do an online poll. WHY has not one single student gone to tutorial? (a) I am so good at teaching this subject that my students can answer all the questions in the textbook just from hearing my talk? (b) They are smart enough to learn the material on their own? (c) They are calling me out? Asking to be failed? (d) They are just planning on sending me 5000 emails the night before the test?

Please answer now! Just do it. Humour me.

Short-term pain for a long-term gain!

How do I save for the future? Here is my two cents on RRSPs.

For many Canadian (especially young Canadians), Registered Retirement Saving Plans (or RRSPs) something of a mystery; however, for the average lumberjack without a pension plan (and even for many with a company plan), RRSPs could help them find have that two scoops of raisins in retirement.

First some basic idea: RRSPs are financial investments (mainly stocks, bond, mutual funds) that you register with the government (most times through a banks, credit union or a broker). In exchange for promising to not withdrawal these investments until retirement, the government will kick you back the tax you paid on the income you invest (one notable exception is that first time home buyers can withdraw money from their RRSPs to purchase a home, as long as you pay it back later (see more here) ).

Here is the real kicker: what if you have no money to invest? Borrowing to invest in an RRSP is not a bad idea for some people. Why? Let's walk through an example: using the calculator . The assumptions given in the calculator are: you are at the 40% marginal tax rate (the percentage of tax on your last dollar earned in 2006), an investment return of expected to 8% (maybe high, but let's go with it), and you want to invest $1000 before MARCH 1st deadline. In addition, (here is really helpful part) it assumes you need to borrow to invest, and that you have to pay 6% interest on the money you borrow, and that you want to repay the money in 2 years or less. Lastly, you have to say when you want to retire: Our example assumes 10 year for now.
THEN: Click on "VIEW REPORT". Given our assumptions, you can pay back the money in 15 months if you use your tax return to pay down the loan, and make payments of $44.31 per month. The interest paid on your loan is $31.34, but after 10 years your RRSP has grown to: $2159. Neat! Now, what if I want to use different assumptions like, assume, I am 30 years from retirement?

Ok, new example, make the following changes: 35% marginal tax rate, 7% cost of borrowing, and 30 years to retirement. Leave everything else the same. How does that change things? We get less of a tax refund (because our tax rate is lower) and we pay about $10 more in interest charges (with higher interest costs), but now that we have 30 years to invest. So, in this example, we turn our $1000 into just over $10,000, assuming an 8% annual return.

Boy, that is fun eh? Give it a try and show your friends! The message: starting young is important, even for lumberjacks like us.

Final note: RRSPs are not for everyone. To know if they are right for you, I know that your financial institution will be happy to give you some professional advice (although I will take questions and do my best to answer them). With that being said, here is some helpful links: Government of Canada RRSP website , how about a self directed RRSP , some definitions to help you.

six dirty secrets or one naked economist

MadJennyFlint has throwin' down the gauntlet: asking the world of bloggers (or at least her readers) to list the top six weird or otherwise unknown things about themselves. MadJennyFlint, why have you done this to the world? Don't you think that things that happen in private, in the past or in a bar bathroom should stay there? Ok, well I will use my poor sense of discretion ...

In no particular order:
If I was left to my own devices, I might: only wear black t-shirts and jeans, eat mostly meat, never shave. Lucky for for me, peer pressure and being too lazy to cook all my own meals have kept me looking respectable (or at least most of the time). O'ya, the fear of a full fledged Tasya revolt will also keep all three things under raps. I am counting these as "things people did not know" 1 through 3.

4.) Age: 10 - paperboy (with my mom and my brother, if that counts). Age: 11 - dishwasher at a nearby restaurant. My parents could not stop me; I was driven; driven to buy hockey cards and candy.

5.) Hair, really long hair (Age: 15-19).

6.) 8 yrs old. The Beastie Boys: Paul Revere, all three parts. Blue TML jogging suit. On stage in front of 400 elementary school kids. Enough said.
(ok, everyone knows I did that ... right?)

End transmission.

Who wants to live to 100?

Maybe the title of this post should be 'I want to live a long life'. Don't worry, I wont spin you an economic tale about the benefits to passing the century mark, but how long we are going to live will affect the choices we make today; consume today or save for tomorrow. But all financial planning aside (even though it is RRSP season ), eating your greens (ho ho Green Giant) could make you more productive and maybe even happier.

After searching the web, here is the best life expectancy calculator I could find. It is not perfect, but it will give you feedback on how to improve your chances. Here is an example: "Increasing your exercise regimen to 4 days a week could add a year and a half, to 5 days a week could add 3 years, to 6 or 7 days a week could add 5 years to your life expectancy".

So, take it for what it is worth - an American doctor's website. Enough said.

Feel free to share your results, impressions or objections.
I got 84 years and Tasya 86 - Gee I hope we can do better than that ... has anyone seen my track pants? Those are back in style, right?

Music and Me: Currently spinning

Looking at another person's music collection is like going through their closet: the good, bad and the 80s. Here are a few items in my rotation.

Current buzz: on the top left of this page are three music links. Each one is unique and special. City and Colour provides clarity. There is just something about Dallas Green dat I like. You might know their hit "Save your Scissors".

Link #2: Joel Plaskett : locally grown and certified organic. Last summer Joel and the band put on an outdoor show in downtown Halifax. It was me, the big clock tower, and a few thousand people - a great time.

My newest favorite: The Reverb Syndicate's homepage provides everything: solid music, mystery and a great video . Personally, I can't stop watching it. No, really. I have made Tasya watch it 23 time this morning. If that was not enough, one of the band members is an economist. Great eh?

So tell me: what is in your closet? Give me the goods, all the dark secrets. Well the 80s was not that bad, we will always have Paul Revere , right guys?

Dylan v.s. Clapton: A classic example of opportunity cost

At the heart of economics is a behavioural science. From the choices of the individual to the aggregate (everyone and their dog), economists focus on relationship between economic variables in complex abstractions called models. If you want to know something about economics, here is a classic lesson on opportunity cost - an important concept in microeconomics.

"Opportunity cost" represents the next-best value you gave up by making a choice.

The test question you always wanted:
You won a free ticket to see an Eric Clapton concert (which has no resale value and zero value to you). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan (because he is so cool!). Assume there are no other costs of seeing either performer.

Summary: the cost and benefit of seeing Clapton is zero, while the cost of seeing Dylan is $40 but - because he rocks you world - he is worth $50 to see preform.

Based on this information, what is the opportunity cost of seeing Eric Clapton?

A. $0
B. $10
C. $40
D. $50

Think about it; harder; harder still ...

Here is the answer:
When you go to the Clapton concert, you forgo the $50 in benefits (represented by your willingness to pay) you would have received from going to the Dylan concert. You also forgo the $40 (the costs) you would have pay to go the Dylan concert. In other words, an avoided benefit is a cost, and an avoided cost is a benefit. Thus, the opportunity cost of seeing Clapton, the value you forgo by not going to the Dylan concert, is $10 – i.e., the net benefit forgone.


Fun eh? Now tell me, what is the benefit of having an extra pint on Friday night compared to the Northend Diner breakfast on Saturday morning? To drink or eat, that is the question. Ok, well we know that most people don't need to calculate the opportunity cost of beer v.s. bacon, and that is the point: Opportunity costs concept helps us describes a behaviours we do each day, just people being people. Doing people things; like choosing between beer and, ahhhh bacon.

Opportunity cost: yours to use, talk about, and even to impress people at on the street.