Real the article below about Bill Wisth and the economics of all-you-can eat buffets, watch the video, and then answer the questions that follow.
Use the internet to find another article about the Economics of all-you-can-eat buffets in order to answer the second question. Be sure to include the webpage link at the end of your response. You may have to read multiple articles before fully answering the question.
http://www.forbes.com/sites/modeledbehavior/2012/05/23/the-economics-of-all-you-can-eat-buffets/
https://www.youtube.com/watch?v=czq_QIUQIRY
Discussion questions:
- Explain the concept of adverse selection and how it relates to the author's argument about all-you-can-eat buffets and health insurance? Why shouldn't either exist?
- How do all-you-can-eat buffets actually make a profit? Be sure to use the terms marginal cost and marginal benefit in your analysis.
30 comments:
Mary M.
1. According to the author, all-you-can-eat buffets are similar to health insurance in that neither should exist according to the theory of adverse selection. According to this theory, businesses and consumers have asymmetrical information. Since buffet restaurants can not tell who will eat a lot and who will not, they can not properly prevent those customers from eating. Similarly, insurance companies can not tell how risky customers might be, and so they can not prevent them from receiving insurance. In both cases, buffets and insurance companies should be forced out of business at some point, since they either have to raise prices, losing customers, or maintain prices, losing money. Neither should exist.
2. All-you-can-eat buffets actually make a profit due to their particular set-up: the food is generally cheaper, they employ fewer wait staff, there is a faster turnover of tables, and light eaters tend to balance out heavy eaters. Since the food is cheaper, the buffet can be supplied more readily than a typical restaurant. Therefore, the marginal cost, the necessary increased supply of food, is combated by the marginal benefit, the price that the cheaper food is being sold for. Also, compared to other restaurants, there is considerably fewer staff employed, so the buffet is receiving a marginal benefit by not having to pay as many people to work. Buffets also have a faster turnover of tables compared to most restaurants. So, while each person may be eating more than usual, increasing the marginal cost, there are many more people eating in total, increasing the marginal benefit. Finally, and most importantly, not everyone who goes to a buffet eats beyond the price of the meal: in fact, many overpay relative to how much and the quality of what they eat. The major marginal cost for the buffet, that many people eat well beyond what they have spent, is surpassed by the marginal benefit, that many people eat less than what they have paid for.
http://yourbusiness.azcentral.com/restaurant-buffets-make-money-20882.html
Nick P.
Explain the concept of adverse selection and how it relates to the author's argument about all-you-can-eat buffets and health insurance? Why shouldn't either exist?
-Adverse selection is the idea that buyers and sellers have asymmetric information, where low-balance, high-quality customers are less desirable to businesses than the average customer, due to being the least profitable. This is common in businesses that offer one price for all, such as buffets. This is because these types of customers can go to an all-you-can-eat buffet and eat as much as ten times the value of the food they are required to pay for. Health insurance suffers from the same issue because health insurer companies aren’t able to foresee who will actually need to buy insurance. With this being said, some people will pay for health insurance, but will require more health care costs than the actual cost of the insurance, thus causing the companies to lose money. Neither buffets or health insurance companies should exist because both businesses have the potential to lose out on money due to adverse selection. Rather than charging a basic charge, these companies should charge their customers based off the value of the product they are consuming or using.
How do all-you-can-eat buffets actually make a profit? Be sure to use the terms marginal cost and marginal benefit in your analysis.
-All-you-can-eat buffets manage to make very good profits, despite being prone to the adverse selection concept. They are able to make these profits through their systematic ways of running their buffet business. Buffets have quick table turnovers, because customers don’t take long to eat, and the food takes even less time to be made. Additionally, they have a small staff, mainly just cooks and a hostess because the customers serve themselves. The buffets also have additional items, other than the buffet, such as beers and salads, that add on to the total cost. Buffets don’t waste much food either, because leftovers, such as meat, can be turned into another product the next day, such as beef stew. People might claim that people eat more than their meal’s worth at a buffet, but in reality, the food costs very little to make, which is why the marginal benefit of the majority of people eating at a buffet overpowers the marginal cost of someone actually eating more than their money’s worth, and having the restaurant lose out on money for that one customer. Therefore, all-you-can-eat buffets are able to stay in business and make very good profits.
http://yourbusiness.azcentral.com/restaurant-buffets-make-money-20882.html
1.The concept of adverse selection states that those who would get the most out of something fixed price are more likely to purchase it, and thus the extra expense for the business drives up the price. In regards to health insurance, this means that those who have a greater susceptibility for becoming ill are more likely to purchase insurance. Because of the information asymmetry, the insurance company has no way of knowing who will need what care, and charges everyone the same price. The price is driven up by the people who pay less for insurance than their medical expenses cost the company, thus driving up the price for everyone. Similarly, those who go to a buffet are the ones who will eat more than the $10 worth of food they are paying for, and the buffet has no way of knowing who will eat how much. This should drive the cost of the buffet up because there is a greater cost of food than is being charged.
2.All you can eat buffets make money essentially by tricking their customers. The marginal benefit that comes from getting customers to eat the lesser-cost foods outweighs the marginal cost of people like Bill Wisth, who eat much more food than they pay for. For marginal benefits of a buffet, there is a lower cost for staff because they don’t need much training, and most of the food can be prepped beforehand. Also, by putting low cost foods such as grains and starches at the beginning of the buffet with large serving foods, the business can save money on the more expensive proteins because people fill up on the cheap stuff first. Lastly for marginal benefits, the average person can only eat about $4 worth of food, no matter how much they think they eat, and they still go to buffets. The marginal costs of a buffet are the people who can eat an incredible amount of food, and therefore pay less than the value of the food that they consume.
Sources:
http://www.quora.com/What-are-the-economics-of-all-you-can-eat-buffets
http://www.fool.com/investing/general/2013/12/12/how-buffets-make-money.aspx
Veronica W.
1. Explain the concept of adverse selection and how it relates to the author's argument about all-you-can-eat buffets and health insurance? Why shouldn't either exist?
The adverse selection theory is based off the idea of asymmetrical information. This means that one person has more information than the other- in this case, the buyer has more information than the seller. In the all-you-can-eat buffet example, the customer knows how much food they are going to eat while the restaurant has no idea. This means that some customers may eat an obscene amount of food for a very cheap price, which may cause the restaurant to lose a lot of money. In the health insurance example, the insurance buyer knows how risky he is while the person selling the insurance has no idea. This allows the buyer to be as risky as he would like while still being insured. Both of these things should not exist because they cause the companies to possibly lose money in an unfair way.
2. How do all-you-can-eat buffets actually make a profit? Be sure to use the terms marginal cost and marginal benefit in your analysis.
Buffets make money because of many factors. At all-you-can-eat buffets, there is a much smaller wait staff because the customers serve themselves. This means that there are less wages to pay. The table turnover is much faster than at a full-service restaurant, which means that more customers can be served in short periods of time. Alcohol costs more money than the set price for food, which is another way that the restaurant makes money. Another factor is that the buffet reuses their food the next day so that no food or money goes to waste. The major factor is that the buffet prices their food based on what the average customer consumes. This allows them to gain a profit because most people consume the average amount. All in all, the marginal benefits of a buffet exceed the marginal costs because the restaurants are still making a good amount of money, despite the small amount that they may be losing due to uncontrollable factors.
website for question 2: http://yourbusiness.azcentral.com/restaurant-buffets-make-money-20882.html
Arman Arneja
1. The concept of Adverse Selection is the idea of information asymmetry between the buyer and seller. Either the buyer or seller obtains information that the other party does not have, causing them to be at advantage. In the case of the Buffet, the customers of the buffet have the upper hand because the buffet cannot not tell who will take the full potential of the “all-you-can-eat” offer and exceed their average cost, causing them to lose money. This scenario is what occurred when Bill Wisth ate over $300 worth of fish, causing the buffet to be at a loss. In the case of Health Insurance, Insures cannot screen how risky their clients are, once again demonstrating this concept of Adverse Selection, and this idea of information asymmetry. In terms of Health Insurance, one reason for their unexpected profit despite the presence of adverse selection is risk aversion. Meaning, most people who have Health Insurance, well, value their health and are the safe, cautious types. And those who take many risks with their health coincidentally do not value their health causing them NOT to have Health Insurance, in turn, allowing these companies to avoid the high costs of several injuries. Either of these businesses ideally should not exist because consumers have the advantage through adverse selection and can take full advantage of these businesses to maximize their benefit, causing these industries to be at a loss.
2. So how is it that Buffets make money? Well in my opinion there are a couple of reasons. One is that there is a great fluctuation. Since everyone has to pay $10.00 many of these people may hardly fill up their plate with enough food for half of what they paid. This is what causes the “average” of the costs to stay low with the occasion Bill Wisth. But why wouldn’t they take full advantage? This leads me to my next point. There is a social aspect that comes into play here. Lets say you are a Bill Wisth. To most, the Marginal Cost of looking like someone like Bill over someone that filled up their plate with $8.00 worth of food is not worth the Marginal Benefit of how much food he is receiving over what he paid. Most will look at bill as “greedy” or “cheap” and to most average people, this is not what image they would want to portray for some extra food on their plate. This is what causes these buffets to make profit and stay in business in my opinion. It is all the way society portrays each other and no one wants to be judged.
Anthony Martino
Period 5
1. Asymmetrical information is the often cause of the market problem know as adverse selection. With adverse selection people would rather do business with a particular type of person. In the buffet case a person who will not eat a lot of food. But the restaurant cannot simply tell who will and will not eat a lot of food. In the health care industry people who feel that they will need health care because of their lifestyle, will buy it more than the person who rarely sees the doctor. This causes a problem because insurers can’t monitor how risky their client’s behavior is. This leaves them with costly customers and high bills to pay which results in higher insurance cost. The two businesses shouldn’t exist because of the moral hazard of turning people away. A buffet can’t turn away an overweight person because they think he’s going to eat up all their profit margin and insurance companies can’t tell how risky a person’s lifestyle is and charge them more but both business models still exists.
2. After reading an article about how buffets profit they use many ways to see a profit. For example they use psychology and asymmetrical information to reduce customer eating. Such as having smaller serving dishes, smaller serving spoons, using uncomfortable chairs and non ideal tables to reduce appetite. Also, some buffets include a service charge for wasted food. If someone is worried about charging extra for wasting food on their plate it will make them more cautious about taking as much food as they could possibly want which reduces the cost for that customer. But what about the customer who eats more than the price of the dinner. The marginal cost of the people who eat more than the price of the dinner does not outweigh the marginal benefit of the people who eat way under the price of the dinner as long as there are more of them.
http://yourbusiness.azcentral.com/buffets-make-money-24374.html
Makayla S.
1.Adverse selection relates to the author’s argument about all-you-can-eat buffets and health insurance because the diners at the buffets and the individuals buying health insurance know more about the profit they will be receiving rather than the business knowing more. The diners and investors of life insurance understand that they are making the best decision based on their life choices. People who enjoy dangerous activities have more information about the product quality because they know how risky they are with their life and health. If they know they are going on crazy adventures and doing risky things they know that buying life insurance will be the best profit for themselves. Before the diners walk into the buffet, they already know how much they are going to eat and the cost. They understand they can fill themselves up until capacity with only paying a limited price rather than going to a non-buffet style restaurant ordering one dish for a high price and not satisfied.
2.All-you-can-eat buffets actually make a profit through the diners who truly enjoy buffets. Although the diners who are attracted to all-you-can-eat buffets have a major impact on damaging the profit margins gained by the restaurant. Buffets that tend to have a higher price make more of a profit because usually families attend the buffet with higher prices on a holiday or special occasion. Buffets charge a separate price for drinks:alcoholic and fresh squeezed juice. The high price drinks plus each family member paying the original price adds up to about how much a normal restaurant would charge. The marginal cost for the specific drinks and specific tables, “Chef’s Table”, lead to the marginal benefits the buffet gains.
http://www.pricingforprofit.com/
Ryan DeBardelaben
1) The concept of adverse selection is that the seller does not have the same amount of information as the buyer. This relates to all-you-can-eat buffets because the owner of the restaurant does not know if the person eating at the restaurant will get one plate of food or ten. This also applies to health insurance because when people want to get insurance, the insurance company does not know how much at risk people are in getting injured. Because of these unknowns, neither of these businesses should exist because they can not identify what they should charge for each customer.
2) The biggest issue that buffet owners have to worry about is people eating too much food. They charge the same amount of money regardless of how much the person eats, so to deal with this issue, owners implement many things so that the restaurant can still make a profit. People eating at the restaurant want to eat as much as they can. They do this so that their marginal cost, the fee of $10 or $12 to eat at the buffet, is less than their marginal benefit, how much food they get. The best way that buffets save money is by selling less of the expensive food and more of the cheap food. They do this by making cuts of meat smaller and giving smaller serving utensils and making pots for starches such as rice and potatoes big and with large spoons. They do this so that diners eat more starch, which is cheaper and will fill them up more. Most food at buffets require little prep time and are often made ahead of time. Because food can be served quickly, more people can go in and out of the buffet. Most buffets charge the people for their soft-drinks which are cheap for the restaurant to produce. Because soft-drinks can be sold on such high-margin, they can act as a great money-maker for the buffet.
ZACH C
1.The concept of adverse selection states that the people that purchase a particular product or service should be the people that need it the most and offer a poor return to the company. For instance, the customers that pay for the all you can eat buffet should be the ones who eat an amount of food worth more than the price of the buffet. If the buffet costs $10 and the average amount of food consumed is $20, the price will then have to be raised. As the price is raised, the average amount of food consumed continues to increase (because the remaining customers eat more than $20 worth of food) and prices have to again be raised accordingly. The same applies for health insurance. The group of people that buy health insurance should be unhealthy and have high medical expenses, for these are the people that need it the most. As more very unhealthy people purchase health insurance, the price is driven up because the expenses for the company are greater. Then, for the less unhealthy individuals, it is not worth the higher price. The price will continue to climb as the average medical costs increase and only the most unhealthy individuals will continue to purchase the insurance. This phenomenon should make it impossible for these businesses to make a profit.
2. Buffets make a profit because their average customer’s marginal cost is greater than his or her marginal benefit. In other words, the majority customers do not eat an amount of food that is worth the price. If a buffet's price is $15 there might be a few customers that eat $20 worth of food, but there are more customers that eat less than $10 worth of food, which still allows the buffet to make a profit. For most people, marginal utility and marginal benefit of another serving reaches 0 before they can consume an amount that is worth the price.
http://mattjwaller.com/2011/06/18/the-economics-of-all-you-can-eat-buffets/
Adverse selection is a concept in which two sides have different knowledge about a certain topic, otherwise known as, asymmetric information. This relates to the author’s argument about all-you-can-eat buffets and health insurance because the companies don’t know who will cost them the most money, so they need to charge everyone the same amount. There may be people that are going to have a large health care cost which the company will lose money on, and then there are people who are going to have a low health care cost. Because you can’t screen your customers, you need to accommodate for this and charge everyone the same amount. The same goes for buffets in that the restaurants don’t know who is going to eat the most so they can’t turn down people. Healthcare and buffets shouldn’t exist in theory. This is because the companies will lose money on those that have a large cost, however they don’t know who that will be since they can’t screen people. In order to accommodate for this the companies will have to raise prices. This will cause the people that have low costs to leave since they no longer view it as worth it since they will be paying a high price for their low cost items. This cycle continues until the remaining people are charged the exact amount for their costs. This means the company won’t turn a profit. If they raise the price, then they will lose all their remaining customers and will go out of business.
An all-you-can-eat buffet is able to make money by decreasing the marginal cost to produce the food. They can do this many ways. For one, they can buy lower quality foods such as cheaper cuts of meat. This allows the buffet to buy in bulk and buy cheap. It isn’t horse meat, but it’s a lower cut of meat so there may be more fat. Also, the food can be made in large quantities, so it will cut down on the amount of labor they need. Large dishes are being made rather than individual dishes, so less labor is needed, which means the restaurant can spend less money. The restaurant also charges you for your drink which can be marked up 100%. The drinks are another source of money for the restaurant that people may not realize. The marginal cost is the lower quality food and the marginal benefit is the availability of an all-you-can-eat buffet. Had the restaurant bought higher quality foods, you wouldn’t have the ability to go up for seconds without being charged for it.
le valiant source: http://www.fool.com/investing/general/2013/12/12/how-buffets-make-money.aspx
Eric G.
1. Adverse selection is the result of asymmetrical information between consumer and seller. It is described as when the people who are most likely to give the worst return to a business is mostly to choose that business for service. In the cases of both buffets and health insurance, the sellers can’t tell who is going to eat the most food and who is going to be the biggest risk, so they charge a flat fee for everyone. Since the businesses aren’t able to see who is the biggest risk beforehand, they have to raise prices. This cycle continues until the business can no longer sustain itself.
2. All-you-can-eat buffets make a profit by weighing the marginal cost and marginal benefit. The marginal cost is how much the buffet is raising the price to, and the marginal benefit is the amount of customers they are getting. Buffets raise prices to the point where they charge a little more than the average consumer eats, so it won’t lose money on the average eater. Adverse selection doesn’t put buffets out of business because while there are some people eat more than they pay for, there are people that will barely eat anything while still paying full price. Since the prices are usually high, the cost and profit are likely to break even in the end.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
Jonathan Congdon
1.) Adverse selection is the concept in which insurers have an issue with the probability of loss as a result of not determining the risk at the time of the sale. The concept of adverse selection relates to all-you-can-eat buffets and health insurance because they both deal with the probability of loss due as a result of not determining the risk. For buffets, the risk is whether or not someone will eat over the price amount of food and for health insurance it is whether or not someone will cost the insurance company more money from claims. The problem with both is that you cannot predict whether or not one person is riskier than the other. Buffets and health insurance shouldn't exist because the buyers of these services have asymmetrical information in which they know whether or not they will make a profit off of the service or not. With this kind of information why would someone ever go into business without knowing this information?
2.) There are a few overlooked ways that buffets actually make a profit. “One, buffet tables turnover quickly since there is not waiter needed to serve people, two, food can be reused and reheated if it is not touched at the buffet so therefore you can use leftovers the following day, three, buffets tend to fill up on low cost starches (e.g., potatoes and bread).” Also there is very low labor costs involved with running a buffet. There are little or no waiters and all that is needed is cooks and a cashier. There also is the cost of drinks which are usually not included in the buffet price, so therefore monetary gains can be made there. The marginal cost of running a buffet is very little because of the low labor costs and the low cost of food; however, the benefits can result in either flourishing profits or catastrophic losses depending on who walks through the door. It all depends on how you set your prices so when that 6’4” 300lb man walks through the door, your wallet can take the hit.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
Max Rosenthal Period 5
1)
Adverse selection is the problem that arises when a consumer has asymmetric information and a producer has an inability to screen out customers. If a buffet offers an unlimited amount of food for a fixed price, the consumer has the benefit when deciding if he eats at the buffet because only he knows how much he is going to eat. So if the consumer knows he is going to eat 15$ worth of food and the buffet is only 10$, the buffet is taking a loss. In theory, the only people who would go to buffets would be the people that eat more than cost of the buffet, resulting in a constant loss for the restaurant. If the restaurant wants to make money, they would have to raise the price to say 20$. However, then the buffet would lose the the people who eat between 10$ and 20$, and the only people who would still go would be the people who eat more than 20$ worth of food. Then the restaurant would keep raising the price until it is an astounding amount and only one person is left going. The same concept can be applied to health insurance. Theoretically, the only people who buy health insurance should be high-risk people who are most likely going to get a return on their money. This would put insurance companies out of business. However, insurance companies are thriving, as well buffets.
2)
There are a few reasons why buffets make a profit. Firstly, there is a social cost of over-eating at an all-you-can-eat buffet. Filling up your plate is economically free, but repeatedly filling up your plate is met with judgement from most people. The social cost of getting more food when you are already almost full is sometimes more than the benefit of eating more and getting more value for your money. Secondly, people are really bad at judging the cost of the food they are eating. Buffet food is usually made in bulk, is poor quality, and very cheap to make. So say if the average eater has 5$ worth of food, the restaurant will simply charge 10$ for the buffet. The price is always higher than the average marginal cost, which allows the buffet to make a profit. A buffet usually has a small wait staff, high turnover rate for tables, and high prices for drinks: all of which allow for a marginal profit.
Tyler P Period 5
1.) Adverse selection is an economic problem that arises when information known to one person is not known to the other person causing the uninformed party to ultimately bring itself more costs; basically, buyers and sellers have “asymmetrical”, or uneven, information. This relates back to the author’s argument about all-you-can-eat buffets because here the uneven or asymmetrical information is that the buffet owners do not know who is going to eat a lot of their food and who is not while the consumer does. This argument also relates back to health insurance because, in this instance, the insurers do not know which of their customers is more accident prone and therefore more likely to become injured while the consumers usually do so again there is asymmetrical information or adverse selection. Neither buffets nor health insurance should exist because there is, theoretical, no way that either of these businesses should make any money. This is because people that eat at buffets or buy health insurance are usually the people who are going to eat the most or get injured the most. So, eventually, how much these people eat or their health care costs will exceed the original price of the buffet or the insurance and these companies must then raise prices so, in the end, they will be losing money.
2.) Ultimately, all-you-can-eat buffets make a profit due to the fact that the consumer believes that the marginal benefits of eating at a buffet are much greater than the marginal cost. The consumer believes that the seemingly endless array of food they are getting and that they can supposedly eat is much greater than the regular, set price of the buffet. However, the consumer almost never eats as much as they think that they will, and so they actually end up eating less food than the set price of the buffet so the restaurant will make a profit. The buffet also make a profit, however, by using smart tricks that will force the consumer to eat less than they would usually would. Source: http://www.dailyfinance.com/2008/10/13/how-all-you-can-eat-buffets-trick-you-into-eating-less-food/
1) Adverse selection occurs when businesses and consumers have access to different information. This allows for desirable results for the business which would not be the case if both parties had the same information. Adverse selection allows businesses to make money while serving customers that believe they are getting a great deal. This occurs in both the insurance industry and in buffets. Both seem like no-brainers to consumers, and it makes perfect sense to either pay for insurance or eat at a buffet. But because of adverse selection, these businesses are still able to make money by calculating averages and charging the right price to both make money and seem like a good deal to the average consumer. Without adverse selection, neither of these businesses would be able to turn a profit, and both industries would cease to exist.
2) Buffets make a profit in many different ways, with each difference from a regular restaurant adding to the profit margin. While people may eat more food at buffets overall, this food tends to be overwhelmingly cheap, such at rice and potatoes. Food can also be reused each night, and used for different dishes. This leads to a much lower food cost, with less waste. Buffets use statistics to determine what the average customer will eat, and base prices off of that. While the occasional 300 pound man will eat an obscene amount of food, buffets are filled with children and senior citizens, who will not eat anywhere close to what they paid for. Lastly, the turnover for each table is much faster due to a lack of waiting for food, as well as a lack of wait staff, which also saves money for labor. These buffets also make money through drink sales and other add-ons. While there is a marginal cost of allowing people to take advantage and eat a ton of food, the marginal benefits in buffets due to these other differences from regular restaurants certainly outweigh the costs.
http://yourbusiness.azcentral.com/restaurant-buffets-make-money-20882.html
Adverse selection refers to a market process in which undesired results occur when buyers and sellers have asymmetric information. This means that The buyers and sellers of products and services have to be selectively equal with their choices. This relates to buffets and health insurance as buffets need to be selective of their quality food and price of admission. Health insurance needs to be selective on their price as unhealthy people may need to pay more. The argument that they both should not exist is that the adverse selection is very oppressive as some customers may be angry of the sellers choices.
The buffets make a profit by analyzing the customers there and selecting how much food and the quality of it they need to make a profit. The marginal cost would be if the customers eat to much as the guy in the video did and the benefit would be to reel in more customers and they eat less.
http://philosophicalmuser.blogspot.com/2013/05/the-economics-of-all-you-can-eat-buffet.html
Adverse selection refers to a market process in which undesired results occur when buyers and sellers have asymmetric information. This means that The buyers and sellers of products and services have to be selectively equal with their choices. This relates to buffets and health insurance as buffets need to be selective of their quality food and price of admission. Health insurance needs to be selective on their price as unhealthy people may need to pay more. The argument that they both should not exist is that the adverse selection is very oppressive as some customers may be angry of the sellers choices.
The buffets make a profit by analyzing the customers there and selecting how much food and the quality of it they need to make a profit. The marginal cost would be if the customers eat to much as the guy in the video did and the benefit would be to reel in more customers and they eat less.
http://philosophicalmuser.blogspot.com/2013/05/the-economics-of-all-you-can-eat-buffet.html
Chris Rudin
1. Adverse selection involves high risk people and increasing prices. There are people in insurance and in buffets that will cost a company little and others that will cost a lot. The companies will therefore set a price that is a little above the average cost. The people who are on the low end will stop buying because the deal is no longer beneficial. This will cause the average to go up, and therefore, the cost as well. So people on the lower end of this will leave, causing averages to go up and cost. This cycle will repeat itself until the cost is tremendous and no profit is being made. That should be the reason buffets and insurance should come to an end.
2. http://www.fool.com/investing/general/2013/12/12/how-buffets-make-money.aspx
The costs and benefits are huge in how buffets stay operational. One of the ways they make their money is through the placement of the food. There are no marginal costs to the business, but the marginal benefits are more filling of the customers for less food consumption. This means they don't have to produce as much, saving them money. Another category is food preparation. The marginal costs are the quality of the food. Producing it in large quantities tends to decrease the quality of it. Some of the marginal benefits are the profit. Producing food in this manner decreases cost of production while still getting the product out there. The process by which it is made is also simple, so there is no need to train new people on how to do it. These companies have very specific and intricate ways to make profits.
1. Explain the concept of adverse selection and how it relates to the author's argument about all-you-can-eat buffets and health insurance? Why shouldn't either exist?
Adverse selection deals with the idea of merchandising goods to those who typically would mar profit and diminish the success of a particular business. Buffet restaurants and health insurance both affiliate themselves with adverse selection nearly all of the time. According to Adam Ozimek, associate at an economics consulting firm, states that “The economic theory of adverse selection tells us that neither (buffets and health insurance) should exist”. Indeed, after taking a moment to consider, both buffet restaurants and health insurance both attract consumers/customers that would strongly represent the adverse selection that could potentially run them out of business.
A seemingly disparate way of profit is the establishment of a business with its foundation utilizing unyielding prices. Since the price is generically standard in the majority of the buffet restaurants, owners are generally unable to alter the prices regardless of who eats how much food. A buffet restaurant is bound to be a haven for those who do not care about the non-monetary costs to eating a plethora of food. The asymmetric information prevents restaurants from predicting when a consumer such as Bill Wisth will walk in the door. Adverse selection comes into play when one realizes that the people who tend to dine at buffet restaurants are obviously bound to be willing to eat as much as they can as opposed to people who want to eat in a smaller amount. Economically, it is a sound argument that those who dine at buffet restaurants are there to enjoy more than they pay for because it is literally possible to do that unlike the typical restaurant.
Similarly to buffet restaurants, health insurances also deal with adverse selection. Due to the fact that tantamount health insurance plans are provided for everyone, asymmetric information comes into play as well. The health insurance companies set equal health insurance opportunities for all people including those who are relatively healthy and do not feel the need to invest in health insurance as well as those who are literally on the verge of dying or living a rather unhealthy lifestyle. (The few that represent those who can There are reasons to wonder how health insurance companies succeed in terms of business when arguably those that need and use health insurance are people that are going to negatively affect the profits.
Ultimately, one can argue that it doesn’t make sense economically that buffet restaurants and health insurance companies make money when the consumers that utilize them are those that are most likely to mar the business.
2. How do all-you-can-eat buffets actually make a profit? Be sure to use the terms marginal cost and marginal benefit in your analysis.
(Number 2 was written on a phone with 10 min left so don't judge me for my terrible writing.)
Buffets make money because people tend to not optimize the marginal benefits for the marginal costs involved. Many people who dine in buffets usually eat there for a special reason such as a gathering. When in social situations the social costs of eating too much or getting a fourth plate would be too much for many people. Another case is that some people are afraid of gaining weight from eating too much even if they are paying to do so. Buffet restaurants can take advantage of these marginal costs that many people face and appear to give the marginal benefit of an unlimited meal. Buffets also benefit because tables turnover rather quickly and they do not have to deal with the costs of numerous waiters and waitresses. So economically, it makes sense that buffets can profit.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
Gabriella Mendola
1)The author argues that both health insurance companies and buffet owners are unable to screen which consumers will use or need their product the most. Because of this it doesn’t make sense for the insurance companies because the customers who are more likely get insured or sick are usually insured. In the same respect, people who are more likely to eat more, go to buffets. This fact makes it seem that neither establishment will profit because they are unable to know who to refuse. Therefore, both establishments, in theory, will go bankrupt so shouldn’t exist.
2)Buffets, despite what the blog author thought, do make profits. This is because consumers believe that they are getting the most out of their money. Therefore they pay the set price because it seems that the marginal benefit is high. However, the buffet owners have certain strategies set in place that the consumer doesn’t realize. For example, the owners take social cost into consideration. The owners minimize marginal cost by using smaller serving spoons so the consumer feels pressured to take less in order to keep the line going. In addition, the costlier foods are cut into small pieces so customers usually only take one of the costly meats to prevent other people from judging them. Another thing owners do is charge a lot for drinks. Something else that people may not take into consideration is often times only some people in a group will eat a lot. Senior citizens and children usually eat less and therefore the buffets promote these kinds of customers by giving lower prices. Another thing that lowers marginal cost is the quick table turnover so less money is lost than at a restaurant. Also, the buffet doesn’t have to pay for waiters or waitresses because people serve themselves.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
http://www.fool.com/investing/general/2013/12/12/how-buffets-make-money.aspx
Matt H
1. The concept of Adverse Selection means when a company is on a losing end of a deal. When a business releases a product or a service, offers it at one price to draw in more people and then it doesn’t work in their favor. Usually this occurs because the consumer is able to take advantage of the deal resulting in a loss for the business. This concept relates to the all-you-can-eat-buffet and insurance article because in both of the businesses they both offer a service that can be taken advantage of by the consumer. In the restaurant scenario, they offer cheap food for a low price. Consumers think they are getting a great deal. For most of the time it is true. However, it is not the case when the consumer is able to eat more food value than the cost. In the case of insurance there are many ways in which adverse selection can apply. There are a plethora of instances that the consumer can keep hidden from the insurance company. For example, a person’s lifestyle: smoking, drug use, sexual activity or the likelihood of certain risks one might take due to work or recreation. Neither of these should exist because there are multiple scenarios where a business loses money.
2. All-you-can-eat buffets do make a profit. The type of people who usually eat at these establishments are not people who are looking for quality food. So businesses can purchase the cheapest and worst food to serve for this “deal.” The marginal cost is lower for the buffets to operate because they can purchase their items at a lower cost. The marginal benefit to the business is that consumers wouldn’t normally be able to consume more than the set price.
1. When the author refers to adverse selection, he is talking about the fact that All-You-Can-Eat Buffets and Health Insurance companies have asymmetric information about their customers. This means that they don't know who will be that customer who will make the most out of their product like Bill Wisth. All-You-Can-Eat buffets virtually don't know who's going to eat more than what they charge, which is why it doesn't make sense for these restaurants to exist. Similar to buffets, health insurance companies don't have the information to see which customers are riskier than others, which is why they have to charge every customer the same amount. Neither buffets nor health insurance companies should exist because neither business models make sense. If the buffets or insurers can't tell who's going to make the most use of their product, than they won't be able to make the most profit they can with only asymmetric information about their customers. If there were more consumers like Bill Wisth, than both businesses would go out of business.
2. All-You-Can-Eat buffets make profit by charging the consumer a price where they believe the marginal cost will exceed the consumer's marginal benefit. As the average amount of food a consumer eats increases, the price buffets charge increases. If the average amount of food people eat is worth $14, buffets charge somewhere around $19. They try to account for people like Bill Wisth by making the price high so that the consumer's marginal benefit never exceeds the cost.
Ashley R.
1. Adverse selection is when people set a cost or price on something without prior information. They don’t know the risks or characteristics an object or person might have. You can see adverse selection in all-you-can-eat buffets because when you have a buffet serving food, you don’t know which customers are going to be eating a little and which customers are going to be eating a lot. Everyone at buffets cost the same, but not everyone eats the same. You can’t charge someone for eating more than the average customer because you already opened the buffet out to everyone and had them pay the same price. Same goes for health insurance. Insurance companies give almost everyone the same rates. They have everyone pay the same amount of money without knowing how risky their behavior is or how dangerous their actions might be. No matter if the person is duper careful or a risk taker; the insurance companies still have the same rates. In buffets and insurance companies, owners worry about people who eat too much and people who are risky. These types of people could cost the businesses money. Because of adverse selection, businesses such as buffets and health insurance should not exist because of all the uncertainties around it. It’s risking money from the companies themselves based on the behavior of other people. People focus too much on the marginal benefit of spending a certain amount and getting more bang for your buck. Another reason why these businesses shouldn’t exist is because the rates would be more communal than independent. If prices to eat at a buffet increased because more people were eating more food, it would be unfair to the customers that only ate a little.
2. All-you-can-eat buffets make a profit by using several different techniques to save money. They tend to have lower labor costs because the waiters/waitresses aren’t really serving the food. The foods at many buffets tend to be of lower quality. Though the food may be lower quality, many people still come to buffets because the marginal benefit outweighs the marginal cost. People can pay a certain amount of money and eat as much as they want. It doesn’t have to be the best food in the world, but they get an okay meal for a low price with an unlimited amount of servings. Much of the food also tends to be reused. Roasted chicken that may not be used during one’s lunch service could then be put into the dinner service’s chicken noodle soup. This could be beneficial to the restaurant and the business itself because they are paying for the one food item. They cook the food item and if it isn't completely used they can just use it for something else and still make a profit out of it. Because of these techniques such as low labor wages and a lower quality of food, buffets are able to make profits. Many people who attend these buffets don’t really care about how good the food is or what’s on the menu, they go there because they are able to pay a fixed price and then enjoy however much of anything they want. They are benefited from the feeling of being full and eating as much as they could.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
Adverse selection is when a product or service is selected mostly by a certain group of people who offer the worst return for the company as a result of asymmetric information between the buyer and the seller. In the case of health insurance those people at high risk such as 55 year old smokers are going to tend to be the ones purchasing the most insurance and ending up less profitable for the company. In terms of all you can eat buffets adverse selection says those who are going to eat much more worth of food than the buffet the cost are going to be the people who most frequently eat at the buffet. So according to adverse selection if the majority of people buying health insurance are going to be high risk and having frequent health problems and if most people going to all you can eat buffets are those who eat more than the cost of the buffet this would mean both health insurance companies and all you can eat buffets would be losing money and shouldn't exist
Although it seems impossible for these buffets to make money, many of them can bring in good profits. Factors such as the restaurants having minimal staff, lower quality food, and little waste make it possible for these buffets to stay open. This is because the marginal cost of having to deal with the small minority of gluttons such as Bill is worth the marginal benefit of being able to have minimal staff, cheaper food, and less waste in the end. Furthermore many of the gluttons such as Bill may be offset by smaller eaters such as elderly people and health conscience people.
Robert Villano
1) Adverse Selection, in my opinion, is very similar to the theory of Natural Selection. In terms of the predicament described in the Forbes article, the theory of Adverse selection states that consumers will only find value in a buffet if cost of the amount of food they eat is greater than the flat charge they paid to have access to the buffet. Thus, the theory makes the point that a buffet would be economically pointless for someone that could not eat a cost of food greater than what they paid. However, as the consumers begin eating a greater average cost of fish, the buffet must raise the flat charge for access to the buffet in order to make a profit. In doing so, the buffet limits its pool of potential consumers since there will be fewer people that can eat an amount of food valued over the flat charge for admission into the buffet. This trend continues until there is such a small pool of consumers that the cost of the amount of food eaten is essentially equal to the flat charge of the buffet. Ultimately, this describes exactly why all-you-can-eat buffets should not exist in economic terms. Similarly, the article describes how the Theory of Adverse Selection is applied to health insurance costs. Insurance companies must charge all customers a flat rate for health insurance since there is really no way to judge how risky a potential client is from the outside. Those who will buy the health insurance plan will be the ones who will use their plan to a greater value than the cost of the flat charge for the plan. In turn, the Insurance company must raise the price for the plan since they would become overwhelmed with the amount of "high-risk" clients who are valuing their plan over the cost of the plan.
2) In order to make money, all-you-can-eat buffets must look to limit costs in any way possible. First of all, there is a demand in an all-you-can-eat buffet for the quantity of food you receive rather than the quality of that food, enabling the buffet to limit marginal costs by selling lower-quality food while receiving the same benefit of people looking to gain access to the buffet. Next is the factor of decreased labor costs. Since the food does not have to be prepared specifically to what the customer desires, there does not have to be a full-time chef on hand. Furthermore, the buffet can limit labor costs by not having to hire waiters/waitresses since the customers will be going to get food themselves. Lastly, one of the major factors in comparing marginal costs to marginal benefits in the buffet industry is time. The buffet must maintain an organized system in regulating how long the food has been sitting out, as well as how frequently new customers are entering the buffet while the food is out. Without a streamline of customers per day, the all-you-can-eat buffet is proven to be substantially inefficient since much of the food will be wasted. However, if monitored properly (how long to keep food out on certain days based on previous observations of when customers come to the buffet, etc.) the all-you-can-eat buffet can be very successful.
Gianna Tinto
p.5
Adverse selection is where the insurer could face possible loss in revenue due to unforeseen risk at the time of the sale. The main cause of this is information asymmetry. Adverse selection is a problem in health insurance and at all you can eat buffets because restraunts cannot tell who will eat too much and risky people lie to insurance agents about their behavior. Theoretically, neither should exist because profits for both areas would be hard to make due to these unforeseen problems.
all you can eat buffets make a profit because for consumers, the marginal cost of eating less healthy, lower quality food, is less than the marginal benefit of the cheap price and the seemingly unlimited food options. Buffets also use smaller plates and utensils to trick you into thinking you are eating more than you actually are. They tend to put the lower costing foods in the front so that you wont have as much room on your plate by the time you get to the more expensive items such as the meats,
http://www.beckershospitalreview.com/healthcare-blog/healthcare-is-like-an-all-you-can-eat-buffet-that-s-a-problem.html
http://www.fool.com/investing/general/2013/12/12/how-buffets-make-money.aspx
The concept of Adverse selection is that businesses such as buffets and health insurance have one price for all of their customers, even though the customers use may use more of the good/service than they paid for. The idea is only those who would use the good/service for more than they pay for would purchase the good/service. The business would raise its price to make up for losses, and then only the people who would use more of the good/service than the new price would buy it, and the cycle would continue until the business would have no customers left. All-you-can-eat buffets make a profit because people who will not eat more food than they paid for go to the buffets. There are various reasons other reasons people would go for, such as if they go with friends or family, don't want to wait for food, or don't want to be rushed while they eat.
Jon G.
1.The concept of adverse selection is the idea that one party holds more information than the other party making undesired results occur in the market. In the case of the all-you-can-eat buffets and health insurance this idea, of adverse selection, holds true since we as the customers have access to more information then the owners of the buffets and the health insurance agencies. The buffet owners have to treat everybody equally in terms of one price for the food even though they don’t know which customers will help them earn a profit by not eating a lot of food and which customers will eat a ton of food and make the buffet lose money. The same can be said for health care because the agencies can't be sure which clients are more accident prone and help them make money so they have to treat each customer the same and charge the same price for insurance. Therefore, according to economist neither of these establishments should exist because if they can't judge who will make them the most money then they will lose profits and not be able to continue operating effectively and therefore should not even exist as a result.
2.All-you-can-eat buffets make a profit by using the ideas of marginal cost in relation to the marginal benefit of the cost of the food in a buffet. The buffet may lose money on a certain amount of customers but due to the high table turnover and the need for less labor helps to balance out the amount of money lost due to customers who consume more food than they paid for from the restaurant. Also to help balance out the marginal cost of having all you can eat the benefit of being able to raise the price and people willing to pay more money helps to increase the profit margin of the buffet and helps keep the buffets open and running.
http://www.pricingforprofit.com/pricing-strategy-blog/how-do-restaurant-buffets-make-money.htm
Zach T.
Adverse selection is the economic concept that occurs when buyers and sellers both have access to the same amount of information,which ends up attracting low-profiting customers. In the case of buffets, this information leads to customers who can eat more than what they pay for in food, which results in the buffet losing money. Also, this can be compared to health insurance in that all customers are charged the same price because the company cannot tell who is more risky than someone else. For both cases, if all that these companies attracted were the customers that were the least profitable, it would make sense that these businesses would eventually be put out of business. However, all you can eat buffets and Health Insurance companies still exist.
All you can eat buffets make money off of the fact that the money someone pays to eat will not exceed the amount of food that the person eats. For most people, there is a social cost associated with bringing a huge pile of food back to your table, or just eating a lot of food in general. Because of this, most customers will not eat as much as they would like because they do not want to be seen as gluttonous. However, the marginal benefits of attending an all you can eat buffet is that if you do not care about the social cost, than you can get MORE than your money’s worth, as is the case with the customer Bill Wisth.
1. Adverse selection is the concept that undesired results occur when buyers and sellers have asymmetric information, where the bad products are more likely to be selected. this is common in buffets, this is so because someone who can eat a lot of food can get a lot of that food for a small price, therefore beating the system. this concept also exists in insurance companies because they cant tell who is actually going to need the insurance. some people will pay for the insurance, and will acquire more health care costs than the actual cost of the insurance, making the insurance company lose money. The author is saying that neither of these companies should exist because both companies have the potential to lose money instead of make money if a large amount of customers or clients who live risky or can eat a lot. If these companies want to exist, they should charge their clients based on how they use their product and how much of it is used.
2. The way all-you-can-eat-buffets make money is because they do not require a large staff, only cooks and such. Also, the food is ready right away, so there isnt a very long wait to eat at buffets, you grab a table and can start to eat. the food costs are also very little, which is why the marginal benefit of the majority of people eating at a buffet beats the marginal cost of people actually eating more than their cost, and having the restaurant lose money for those few customers. In conclusion, this is how buffets stay in business and make a good deal of money.
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