We teach that people make decisions comparing marginal benefit to marginal cost. We labor economists apply this to decisions about work, telling students to compare the return (the wage) to the opportunity cost (the value of non-market time).
This has been an extremely powerful tool, but it masks so many complexities. For example, how is it rational that I cook on weekdays, even though my hourly wage is higher than my wife’s (and I am a truly lousy cook)? The answer is that, as an academic, my time during the day is flexible, so the opportunity cost of my time can be viewed as low just before suppertime. As an attorney, my wife’s time is much less flexible, so her opportunity cost is higher.
I bet there are lots of cases in other areas where the proper measure of opportunity cost varies over time in surprising ways and leads consumers/producers to make apparently anomalous decisions.
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@BSK; It sounds nonsense because you apply it wrong. The major cost for going out/cooking is the money you wish to spend on your “free” time. For people who like cooking this may turn out differently than for people who do not like it. The theory works, but it has to be applied with an almost infinite amounts of variables.
There is more to the story than what was told, regarding preferences, availability of time, and other factors in the relationships. The professor was referring to a real life deviation from a simplistic model which is bound to happen. As he is not telling us all the factors that made up his preferences, we can not simply look at his hourly rate to determine whether he will cook or not on weekdays. The low opportunity cost before supper time does not make sense either. Doesn’t make sense to have one’s opportunity costs of his time change throughout the day.
One possibility is that – the professor is overpaid.
Chris in 11:
> Doesn’t make sense to have one’s opportunity costs
> of his time change throughout the day.
Why not? Electricity costs more at 4 p.m. on a hot summer afternoon than at 2 a.m. on a winter morning. There are things that I can only do during certain hours. There are some hours when I can do nearly anything. Why wouldn’t I value a high-opportunity/high-demand hour more than a low-opportunity/low-demand hour?
In the time just before dinner, practically every store is open (I can run any errand); practically every person I want to spend time with is available (I can enjoy friends and family); practically every task that requires daylight can be done; practically every task that needs doing today is due right now.
Why shouldn’t I think that how I use my time shortly before dinner “costs” me more than how I use my time, say, shortly before bedtime?
“Doesn’t make sense to have one’s opportunity costs of his time change throughout the day.”
Yes and no. The minute-to-minute costs do not have an appreciable delta, but there is a point of diminishing returns.
Certainly we can say that the professor must sleep a certain minimum number of hours of the day, and during that time he will not be able to work. So let’s imagine an ideal artificial scenario where his employer will pay rate X per page for an unlimited number of pages in academic papers written. There is suddenly the question of scaled productivity. If he decides to work 20 hours a day, but due to lack of sleep he actually gets less done than if he had scaled back to 10 and not burned himself out, then his opportunity cost to work each additional hour is correctly expressed as variable (and indeed at some point the opportunity becomes negative).
In the more complicated case of reality, there is reasonably some market limitation to a normal person’s time — specifically that one *could* probably get fast-food jobs with round-the-clock flexible hours, but finding unlimited hours in other occupations may “cost” so much that it is simply not a reasonable possibility. At some point a supervisor will likely jump in and say, “The quality of your work is suffering, so I’m redirecting some of your workload. Go home.”
Another consideration: The wife has a higher opportunity cost because she (or her firm) bills her time by the hour. So if she works a few extra hours, she earns revenue. Even if she is salaried, her billable hours probably count heavily toward her raises, promotions and (if applicable) partnership distribution.
I don’t ‘work’ in the paid, traditional sense. I stay home and look after our two year old so my time is reasonably flexible.
My husband works and is always very busy at work. Yet, I never cook dinner.
I am no economist so how does our model work? Would love to know…
Hammermesh does this a lot. It is not correct to use your working wage as your opportunity cost.
Your wage is higher, so your time is more valuable…. when you are doing your job. Not any other time.
If your wife’s time in the evenings is less valuable than yours, the economically efficient arrangement would be for her to spend enough leisure time for the two of you, and you can work twice as much.
Just cook, Breadwinner.