Monday, April 21, 2008

What price an A?

An economist at a large state university mentioned to a student that he pays his teaching assistants $5 each if someone gets 90 percent or more correct on the final exam. The economist had previously paid off only twice in 29 years of teaching large introductory sections (total enrollment about 15,000 students over the years). The student pointed out very cleverly that any student who does well creates a positive externality (the dollars paid to the teaching assistants), so students in the class should be subsidized to give them the proper incentives to study hard. Who should offer the subsidy, the teaching assistant or the teaching economist? Identify and explain the underlying principle at work here.


Jeff Staudt said...

Clearly, the teaching assistant(s) should offer the subsidy to the class, since it's in his/her best interest to do so; viz., if any one student achieves a 90% or higher score on the final exam, then the T.A.'s each receive $5. Therefore, the T.A.'s could offer a certain percentage of the payout to those who achieve an 'A'. Not only would the students have the benefit of a good grade, but they'd also be wealthier: a very good incentive to study!

While a good professor wants her students to perform well, the economics professor making the offer here needs to weigh the costs and benefits of her proposal: on the one hand, you have the benefit of students achieving high final exam scores; but the downside, of course, is having to make good on one's financial pledge.

Greg Delemeester said...

Jeff, you have the right explanation for what should happen in this situation. All you have to do now is identify the underlying principle at work here.

Jeff Staudt said...

As an addendum to my explanation, I believe the underlying economic principle involved here is opportunity cost for all parties concerned: students, teaching assistants and economics professor.

For the students, the opportunity cost is the time spent studying, because that's a resource they'll never regain and it could be used towards some other use. The potential benefit of studying was mentioned previously.

For the teaching assistants, they'd have to weigh the costs/benefits of helping the students study further and subsidizing the students' study incentives.

I mentioned the costs/benefits to the economics professor in my previous post, too.

Again, I'm fairly certain that the fundamental principle involved in this situation is cost/benefit or marginal analysis.