Last year, in conjunction with a conference honoring Gary Becker, the Initiative on Chicago Price Theory was renamed the Becker Center on Chicago Price Theory, founded by Richard O. Ryan, MBA �66. Our goal remains the same: to further the rich tradition of Chicago economics that emphasizes answering real-world questions through a combination of rigorousmodels and careful data analysis. Thanks to the incredible generosity of donors we now are tackling these problems on amuch greater scale.We have instituted a range of new programs, including an intensive �summer camp,� where PhD students from around the country spend a week on campus to learn the power of Chicago Price Theory, and the wildly popular Brown Bag Lunch Series at the GSB, in which faculty present their latest research findings to MBA students.

I�m happy to report that our activities are having an impact. Our first two Becker Fellows, Emily Oster and Jesse Shapiro, received tenure-track offers from some of the world�s finest institutions, but have chosen to join our faculty (Emily in the Department of Economics, Jesse at the GSB). In addition, our first four research associates have all been accepted to top PhD programs.We believe that they represent the future of Chicago Price Theory.

Then, there is the research itself. This issue of Capital Ideas gives you a taste of the wide range of exciting economic ideas that have been floating around the Becker Center in the past year. The papers in this issue explore the fundamental role that prices play in organizing economic activity, be it the price that employers place on a worker's skills, the price of a lifesaving water decontaminant, the price of unprotected sex, or the price of bagels and donuts.

Gary Becker and Kevin Murphy have shown once again that there is no better pair of researchers when it comes to generating basic insights about the most fundamental issues of our time. In the first article, �Inequality and Opportunity,� Becker and Murphy document the enormous increase in earnings inequality that has taken place in the United States over the last 25 years.When policymakers and the media discuss inequality, it is often with the view that inequality is �bad� and that we need policies like high tax rates on the rich to �correct the problem.� Amore thoughtful analysis, as provided by Becker and Murphy, shows that rising income inequality is themarket�s response to a greater demand for the human capital generated through investment in education. They argue that the answer to the problems generated by inequality is not a highly progressive tax system that reduces the incentives to invest in education. Instead, when the returns to education are high, sound government policy should aimto provide encouragement for individuals to invest evenmore in education.

Emily Oster also has a knack for asking the big questions. In her article, �Preventing HIV in Africa,� Oster notes that roughly 25 million people in sub-Saharan Africa areHIV positive, and almost all of these infections are the result of heterosexual sex. Because of the risk of AIDS, the �price� of sex is much higher than it was in the past. However, there appears to have been little in the way of behavioral response to this price.Why is that the case? When AIDS raised the risk of homosexual sex in the United States, behavioral changes were swift and dramatic. Oster shows that within Africa, the behavioral response has been much larger for those with high incomes and longer life expectancy, just as economic theory would predict. Contracting AIDS is more costly, in a sense, for these people because there is more to lose from becoming infected. The difference in behavioral response between Americans and Africans does not appear to be driven by culture or ignorance of the disease in Africa, but rather by lower incomes and shorter life expectancies even without AIDS.

In the third article, �The Economics of Pricing,� Jesse Shapiro studies prices in Africa in amore traditional economic context. Clorin is a life-saving water purification product that kills pathogens in household drinking water. Shapiro and his coauthors ask:What is the right price to charge for Clorin to maximize its usage? Giving the product away for freemay not be the best solution. First, nongovernmental organizations (NGOs) that provide the Clorin must spend money to distribute it. If the NGOs are able to raisemoney fromits sale, they will be able to deliver more Clorin. Second, there may be psychological reasons why people are less likely to use a product they receive free than one that they are required to pay for— the perceived value of the latter may be greater. To test these hypotheses, Shapiro and his coauthors conducted a randomized field experiment in Zambia. They find that increasing prices leads to less purchase of Clorin, but not much less use. At higher prices, consumers want less of the product, but those who are willing to pay the price are farmore likely to use it consistently. The price that maximizes overall usage, they find, is greater than zero, but less than themarket price.

The last article in this issue, �An Economist Sells Bagels,� describesmy research into howfirms choose profit-maximizing prices to charge for their goods and quantities to produce. Despite the fundamental importance of profit maximization, there has been very little economic research into the question. Firms are so complex that answering the question becomes impossibly hard. To get around that problem, I look at how one particular entrepreneur approaches these decisions in the context of one of the simplest businesses imaginable: delivering bagels and donuts to office parks where workers leave payment for the goods on the honor system. Using more than a decade�s worth of detailed data, I show that the business owner does a fantastic job of choosing the quantity to deliver, but does extremely poorly with prices. By my estimates, he lost 30 percent of his profit because he charged the wrong price.Why is he so good with quantities and so bad with prices? I argue that it is because he gets clear and immediate feedback on his quantity decisions, but not on his prices. Absent feedback, there is little reason that this business, or any other, will learn about its mistakes. The diverse projects highlighted in this issue of Capital Ideas demonstrate the power of Chicago Price Theory. I hope you enjoy reading about this research asmuch as we have enjoyed producing it.

Steven D. Levitt
Alvin H. Baum Professor in the Department of Economics at the University of Chicago and Director of the Gary S. Becker Center on Chicago Price Theory, founded by Richard O. Ryan, MBA ’66 at the University of Chicago Graduate School of Business