7.6 - Indifference Curves and Subsidies

Summary

In this video, Richard McKenzie explores the application of indifference curve analysis in relocating employees from low to high housing cost areas. He illustrates how an employee's budget line shifts when moving to a high-cost area, demonstrating that a simple salary adjustment may not suffice to maintain their standard of living. By analyzing housing costs and overall compensation, he reveals that companies can often meet employee needs without fully compensating for increased living expenses. This insight emphasizes the balance between adequate salary and employee satisfaction during relocations.

Takeaways

• 😀 Indifference curve analysis helps understand employee relocation decisions based on housing costs.
• 🏡 Relocating from a low-cost housing area (like Six Mile, SC) to a high-cost area (like Irvine, CA) presents significant financial challenges for employees.
• 💵 An employee earning $100,000 in a low-cost area can buy more housing compared to the same salary in a high-cost area due to differing housing prices.
• 📉 Moving to a high-cost area without adequate compensation leads to a decrease in the employee's purchasing power for both housing and other goods.
• 🔄 Employers need to consider that compensation should match increased living costs when relocating employees.
• 💰 If an employee demands $130,000 in a high-cost area due to increased housing costs, the employer may not need to meet this full amount.
• 📊 Adjusting the employee's budget line in economic terms can help analyze the impact of salary changes on purchasing options.
• 🎯 Employees may prefer combinations of goods and housing that provide more overall satisfaction than merely matching previous living conditions.
• 📈 Providing additional income can give employees greater flexibility in spending, potentially improving their overall utility.
• 🔑 Ultimately, companies can effectively manage relocation costs without fully compensating for housing cost increases, leveraging employee preferences for a broader range of goods.

Q & A

What is the primary focus of Richard McKenzie's video module?

The primary focus is on applying indifference curve analysis to the problem of relocating a key employee from a low housing cost area to a high housing cost area.

What key locations are compared in the analysis?

The analysis compares Six Mile, South Carolina, a low housing cost area, with Irvine, California, a high housing cost area.

How does housing cost impact an employee's purchasing power when relocating?

When relocating from Six Mile to Irvine, the same income of $100,000 allows for less housing and fewer goods to be purchased in Irvine due to higher housing costs.

What happens to the employee's budget line when moving from Six Mile to Irvine?

The budget line shifts downward in Irvine, indicating that the employee can afford less housing and fewer goods with the same income compared to Six Mile.

What is the significance of the employee's compensation request in Irvine?

The employee may demand higher compensation, such as $130,000, to cover increased housing costs in Irvine, aiming to maintain their previous standard of living.

How does the analysis suggest companies can manage employee compensation during relocation?

The analysis suggests that companies do not have to fully meet the employee's compensation demands; they can adjust salaries to provide sufficient income for the employee to achieve a similar standard of living.

What does the term 'indifference curve' refer to in this context?

An indifference curve represents combinations of goods and housing that provide the same level of utility or satisfaction to the employee.

Why might an employee be better off financially in Irvine despite higher costs?

An employee might be better off if the increased income in Irvine allows them to purchase a combination of goods and housing that was previously unattainable in Six Mile, even if they receive less housing for their money.

What conclusion can be drawn regarding real income in low versus high housing cost areas?

The conclusion is that much of the employee's real income in a low housing cost area is tied up in housing, while income in a high-cost area can be spent on a wider variety of goods, making additional income potentially more valuable.

What is the key takeaway regarding employee relocation and compensation?

The key takeaway is that firms can effectively relocate employees without fully compensating for increased housing costs, as the real value of income can differ significantly between low and high housing cost areas.