Tuesday, May 05, 2009

Value of Time: Coke Edition

Economists like to use revealed preferences in the market place to estimate things that are not traded...like time. This allows us to estimate the value of time saving projects like roads. Here is some data on my behavior, that allows for just such an estimation:
  • I routinely purchase a 20 oz Coke from the vendor in our atrium at $1.78.
  • I have the alternative of purchasing the exact same product from a machine in the business school next door, but at a price of $1.25.
  • Walking to the B-school Coke machine requires (on average) an additional 160 seconds than if I had purchased it from the vendor. Unfortunately, it also requires (on average) an additional 142 paces. The route is not particularly scenic, nor crowded, so there isn't much in terms of disutility or utility from walking the route.
  • Since I routinely buy the closer, more expensive Coke, I have revealed that my value of time preference is at least (1.78-1.25)/160 = $0.0033125 per second...or $0.19875 per minute....or $11.92 per hour.
  • It takes usually about 90 seconds to purchase something from the vendor. If that vendor could find a way to cut another 30 seconds off that time, they could conceivably charge me almost another $0.10 for said Coke.
  • Suppose a vending machine could be invented that would read my mind and make a Coke appear on my desk the moment I decided to get up and purchase one, cutting the time of Coke retrieval down to zero. We can infer that I would be willing to pay about $2.07 for that Coke.


Will Luther said...

Refining the calculation:
Do you usually spend 90 seconds at the vending machine? If you spend more or less time at the vending machine, you would have to adjust the "time saved" variable in the denominator.

Also, do you derive any utility (disutility) from interacting with a person instead of a machine? Are both cokes the same temperature and, if not, do you have a preference for one over the other?

[What about differences in the probability that you run into someone you like or dislike on the trek to the machine...]

Some of these things are not so easily measured (though fun to think about). But depending on the signs, we would know whether $11.92 is definitely the min or just a ballpark estimate of your time preference.

Jason O said...

Well, you should also consider that you have incomplete information. There are also soda vending machines directly below your office in SPEA. There you have the options of 12oz cans for 75 cents and 20oz bottles. They also would likely take much less time acquire.

Justin M Ross said...

Jason: The credit card scanner on the machine downstairs doesn't work. I think the signal is too weak in the basement to get through the building.

Anonymous said...

What about Mexican Coke? It is made with real sugar!