Give these yachts some thought

Yachts for profit maximization, not utility maximization? This is exactly what is being reported in an article last week in ChinaDaily news, click here for the article.

To most people in China, yachts are luxury goods that are associated with an extravagant life of high status and leisure. Some believe there may be other reasons in owning a yacht, reasons that enter one’s production functions and not utility functions.

The bosses of successful companies are purchasing these yachts to make more money. Many multi-million dollar business deals are being done out on these boats when they set sail. The yachts being bought by the rich are a way of signaling. Signaling, in economics terms, occurs when it is hard to distinguish "good" types from "bad" types (in this case business deals), and there is a costly method available to signal you are good type such that the cost of signaling is too high for bad types that they won't do it. Yachts are status symbols that offer privacy and entertainment and impressive views during small trips for business partners. This is where the profit maximization comes in. The results of these meetings are the business deals that are negotiated in these pleasing environments.
Here is some math that may help…

The yachts cost roughly 2,000 Yuan ($300) a day, even if they stay docked and don’t sail. This is 400 Yuan more than the city’s monthly per capita income in 2009. For one year the cost of keeping a yacht then would be about 730,000 Yuan ($109,500), not to mention the 6 to 7 million Yuan just to buy it. If the business deals were in the multimillion profit range, to pay off the whole cost of the boat (fixed and variable), you would only have to do one of these business deals successfully once a year.

The article also reports that China is now the world’s second-biggest consumer of luxury goods, and their total consumption accounts for 27.5 percent of global consumption in 2009. The yachts are not luxury goods in the way Canadians would perceive them to be here. The increase in luxury good consumption in China is the result of an increasing population and personal incomes. This is a Utility maximizing purchase, such as Chanel, Hermes, Dior etc.