The MPG Illusion

Couple days ago I came across an interesting video on YouTube called “The MPG Illusion” by Duke University-Fuqua School of Business. Rick Larrick and Jack Soll in the video posed an interesting question: Will it be better to upgrade a car from 10mpg to 20mpg than 25mpg to 50mpg? Most people will answer no. Most people assume there is a linear improvement in mpg, the bigger the improvement the better. However, with some simple math tells us otherwise.

(The researcher: Rick Larrick and Jack Soll also post a news release on Duke's Fuqua Business web)

Over a distance of 100miles, 10 gallons of gas will be used by a 10mpg car will use, 5 gallons for a 20mpg car, 4 gallons for a 25mpg car, 2 gallons for a 50mpg car. Hence, upgrading a 10mpg car to 20mpg car will save 5 gallons of gas every 100miles, versus 2 gallons for the other situation. If we plot this problem into a graph as below, we can see there is a diminishing return on gas usage as the mpg increases. Though another question arises: Is it worth it to switch your old car to a new more fuel efficient one?

23 mpg highway, surprisingly efficient!

Today, I saw an interesting Honda car ad while watching Studio 60 of the Sunset Strip on Hulu.com. A great show that I regret missing when it’s on. The ad begins with a group of people stuck on the highway and suddenly a stunning 2009 Honda Pilot drives by and saves the day. The ad end by the driver saying, “This car gets 23 mpg on highway, surprisingly efficient!”

There are two interesting things about the ad. First, at a high gas price most of us automatically pulled our anger lever and began to drop F-bombs on Big Oil. As if Big Oil is greedy criminal scums that stole from the poor. Yet from my personally experience, very few bought more efficient cars or moved closer to work, because they have/need to live 80 miles away from school (work) or drive a car with low fuel economy. Besides, when you imply you have/need something means you will purchase it with any price, because you can’t survive without it. Simply, you just want it and choose to get it. A vertical demand curve does not exist in this situation. There are plenty of substitutes.

Second, is 23 mpg highway efficient? According to National Highway Traffic Safety Administration estimates our national fuel economy averaged 26.6 mpg. At Carsdirest.com out of 36 mid-size SUV, including the 2009 Honda pilot, coming out this year averaged 21.89 mpg highway. Although, the 2009 Honda Pilot is 1.11mpg more efficient among its peer group, but there are 9 out of those 36 mid-size SUV with better fuel economy. Furthermore, the 2009 Honda Pilot is below the national average when fuel economy becomes your major concern. There are plenty better alternatives and no one needs a SUV to survive.