Microeconomics the Japanese Are Rationalizing

Microeconomics

The Japanese are rationalizing their rational choice more than the Americans are. Of the three options for bequests that are presented, the one that most closely resembles rational choice is the "selfish" parents who spend the money for themselves. In such a situation, they are maximizing their own benefit, which is what a purely rational actor does. Rational choice theory holds that individuals always make prudent and logical decisions that provide them with the greatest benefit (Investopedia, 2012). This effectively excludes saving money for future generations, implying that a rational parent spends and saves as little on their children as possible. Thus, the Japanese are being more rational in their approach to bequests.

Adam Smith is considered to be the father of rational choice theory, so he would view the selfish choice as the best one (Swatos, no date). Collective choice appears to outweigh individual choice in the United States, something that runs against the stereotypes of the cultural norms. In the United States, more parents were concerned with amassing wealth for the purpose of passing it onto their children, something that demonstrates collective behavior. The Japanese, with respect to family wealth, were more likely to demonstrate individualistic behavior, where the parents act with little consideration for the welfare of their adult children.

Opportunity cost may play a role in bequest decisions. In the United States, there is a perception that people have upward mobility. This may cause parents -- accepting that their station in life is relatively fixed by middle adulthood -- to pass wealth onto their children so that their children can invest in education, homes and other things that will help them improve their wealth. In Japan, there is less upward socio-economic mobility. This implies that there is less an opportunity cost associated with spending one's own money. In the U.S., the opportunity cost could be high because the children could be significantly more successful than the parents, and in such a situation some of that wealth may find its way back to the parents at an old age. This creates a higher opportunity cost associated with selfishness.

There could be diminishing marginal utility in the selfish strategy, because there is a point where one is living as well as one wants. In general, as one enters their elderly years -- certainly over 80 -- one gains little from spending money anyway, so additional selfishness at that point yields limited results. In the United States, the marginal utility may diminish at a slower rate, due to the far lower levels of government coverage for personal health care. More selfishness in the U.S. would be expected because the quality of life at a very old age is going to be affected much more in the U.S. than in Japan by personal wealth.

Part II. The law of diminishing marginal productivity holds that means that the more productivity is improved, the harder it becomes to improve productivity. There is a theoretical maximum level of productivity given current levels of technology. This case does not directly illustrate this, because productivity increased 5%. If in the next quarter that productivity gain shrinks, that would demonstrate more clearly the law of diminishing marginal productivity. This is because, for example, if the worker is already working 49 hours in a week, if another hour is added the worker will be less productive in that 50th hour than he/she was in the 49th hour.

Labor and productivity are not related to marginal utility. Marginal utility reflects the additional benefit of an additional unit of spending, where spending refers to consumption. The concept is similar to productivity, because that is spending by business on labor, but productivity is related to dollar value output, whereas utility is related to happiness and other personal benefits. The concepts are similar, but they are not the same and increased labor spending is therefore not related to marginal utility.

The case makes an allusion to the difference between short-run and long-run profits, in that the case argues that the productivity increases today will be difficult to match in the long-run, particularly as the economy improves and businesses. However, the long-run argument is not strenuously made, perhaps because there are other considerations such as improvements in technology or the cost savings associated with outsourcing. However, that the case highlights that there is a difference between short- and long-run profits and that business decisions today may reflect a trade-off between the two is a positive thing.

The case does discuss short- and long-run production costs, and it is discussed whether the moves to improve productivity today are sustainable in the long-run. The abnormal increase in productivity may well be related to short-run cost improvements, but in the long-run the cost improvements may not be as significant. Labor markets, for example, are highlighted in the case as a market where short- and long-run costs can be attributed, and where firms must consider both before making decisions.