Which would you rather have, if you are able to choose between two possible earning outcomes:

 

• A: Your current yearly income is $100,000; others earn $50,000
• B: Your current yearly income is $200,000; others earn $400,000

In both cases, the value of the money is the same. Inflation is at 2% and stable.

Which would you choose? (Wr ite your selection down before flipping the page to Part II. Please)

Part II.

I'm always fascinated by studies about human behaviour. Studies have shown thatabout thepopulation would choose Option A. What other people earn has nothing to do with what you can spend your money on. This result may seem illogical, right? Well, let's see. It's surprising.

Background:

 

Thorstein Veblencoined the term "conspicuous consumption" to describe the acquisition and display of possessions with the intention of gaining social status (1899). Conspicuous consumption is undertaken or pursued in order to enhance one's position in society, which can be achieved through signalling wealth, public demonstration and communicating affluence to others. Veblen's theory of conspicuous consumption is based on the premise that those who put wealth in evidence are rewarded with preferential treatment bysocial contracts.The "Veblen" effect depends upon a comparison of the desireablility of signalling through price, quantity or quality.

 

It is not new. Conspicuous consumption and the related status consumption are as old as the hills. Prehistoric war leaders had fancier swords and decorations. Food and drink were employed to provide ostentatious displays of a person's wealth and influence. Historically, the best artisans, painters, sculptors were employed by the wealthy to show power and swagger.

Conspicuous consumption spans cultures, too. It is not limited to the U.S. and it is not limited to materialistic societies. Studies across countries and cultures find evidence of conspicuous consumption behavior across the globe, in emerging countries (Brazil, India, China, etc) as well as the developed countries (U.S., England, etc). Furthermore, recent time series/cross section studies show thatincome inequalitywithin a country impacts conspicuous consumption. Research has demonstrated that as income inequality increases, with average income held constant, the poor class would reduce conspicuous consumption and as a result, the rich class would reduce conspicuous consumption because the marginal benefit of conspicuous consumption becomes smaller. Across the pool, when income inequality increases within a country, the higher-income consumers do not increase conspicuous consumption as much as lower-income consumers decrease it, hence reducing the society's average level of conspicuous consumption. The finding that greater income inequality decreases conspicuous consumption may suggest that we may have an opportunity to save some resources and use them in a more productive way.

Now that you have some background into the idea, what are your thoughts?

Question 1: What is the opportunity cost of choosing option A?

Question 2: Is conspicuous consumption a waste of resources? Do you believe there is measurable "inefficiency" associated with this type of behavior?

Answer rating: 100% (QA)

Answer 1 The opportunity cost of choosing option A is forgoing an additional 100000 in annual income Opportunity cost represents the benefits sacrific... View the full answer