1. that Ed was stupid because he didn't understand the principles of supply and demand.
2. that Ed's customers were stupid to stand in line for many hours to save $15 on a Christmas turkey.
3. both the above.
4. none of the above.
Choose the option that yields the correct answer.
The correct answer is option 4. Option 1 is frivolous---Ed didn't parlay a small corner store into a huge merchandising operation, a theatre and restaurant complex in Toronto and a famous theatre in London, England by being stupid. Stupidity on the part of Ed's customers must also be rejected. A poor person on a small pension or an unemployed welfare recipient might find it well worthwhile to wait in line for 6 hours to obtain a $15 bargain---the implicit wage is $2.50 per hour. We would predict, however, that there would be no $100,000+ per year lawyers in the line-up!
The assumption that people are stupid is not a good starting point for analyzing their behavior because there are many ways to behave stupidly and there is no rational basis for a person to choose one stupid action over another. It is much more fruitful to assume that people behave purposefully in their self-interest and then ask ourselves how self-interest might have motivated them to behave the way they did.
It would seem that Ed was accomplishing two objectives with his bargain-turkey program. First, he got cheap advertising, provided he didn't give away too many turkeys. Second he got the enjoyment of seeing some of his less affluent customers have a happier Christmas. But why did he make these people wait in line? He could try to eliminate the line-up by giving everyone a number at random when they enter the store, having preassigned turkeys to half the numbers. One would predict that this would shorten but not eliminate the lineup--at an implicit time-value of $2.50 per hour, one would stand in line only, say, 3 hours for a 50 percent chance of getting a $15 bargain. This would also create uncertainty for his customers.
Another alternative would be for Ed to keep records of who his best customers were during the year (i.e., who purchased the most), and give out turkeys to them. This would have probably cost Ed more than waiting in line would cost everyone in the lineup, and he would have ended up giving out free turkeys to some people who are quite affluent.
Ed could also have interviewed all his customers and checked their financial situations, and then used this information to decide upon who "needed" turkeys and who did not. This would have involved an enormous expenditure of resources.
By doing things the way he did, Ed invoked a process of self-selection to pick out and give cheap turkeys to those of his customers who: a) are low income earners and therefore have low opportunity costs of standing in line; and b) are willing to make the effort to work towards a better Christmas for themselves and their families. Most of us would agree that these are the people that deserved cheap turkeys.