Archives for opportunity cost



The Opportunity Cost of an Email

There’s a midterm this week in my class of 550 students, and I have been deluged with emailed questions, many procedural, that are covered in the online daily class summary. (For example, is the test being given in class?)  In the old days, when students came to office hours to ask questions, I wouldn’t have gotten most of these queries.  Regrettably, a student’s opportunity cost of emailing is much less than the cost of an office visit.

Why don’t I raise the cost to students by refusing to answer these emails?  If I thought that would deter all such questions and visits, I would refuse. But even if 20 percent of the emails translate into student visits, I’m better off answering the emails, since each takes me at most 1/5 as long as dealing with the question face-to-face in my office.  This is annoying, but I believe I save time this way.



Maximizing Profits: Contract Out or DIY?

We did a kayak/hike/swim tour with Kayak Wailua in Kauai, Hawaii, mainly because our guidebook said it was as good as other tours and less expensive. I think the book was correct, so I asked the guide: “How do you guys charge a lower price and still survive?” 

He answered that they are larger (because they have more permits for river trips), enabling the owner to do his own booking directly, thus saving expenses. Fine, but implicitly the opportunity cost of his time must be less than the cost of contracting out, or he is not profit-maximizing. If he is profit-maximizing, then implicitly he has taken advantage of economies of scale in this “industry,” while his competitors haven’t. If that is so, I would expect some consolidation among his competitors as they understand the shape of long-run average costs. (HT: KY)



The Opportunity Cost of Water

With the continuing drought in South Texas, the issue of how to allocate scarce water resources has flared up again. Rice farmers south of Austin want water from the Colorado River for their crops; yet the two storage lakes on the river, which provide most of the Austin area’s drinking water, are less than half full.  As one rice farmer told the the Austin American-Statesman: “Water availability should be based on sound hydrology and not on political pressure.” It should be based on neither—it should be based on economics—what is the opportunity cost of the water?  In particular, one might ask why the U.S. is growing rice at all.  It is hard to believe we have a comparative advantage in rice-growing and that it shouldn’t all be imported.  That’s especially true about rice grown in dry South Texas. We grow rice because of entrenched interests that obtained water rights many years ago.  The rice farmers get heavily subsidized water precisely because of the political pressure this man deplores—and they now want to compound the effects of bad policy.



The Opportunity Costs of Cheap Paper Towels

My university uses thin brown paper towels in all bathrooms. They cost less than white paper towels.  My student claims that the opportunity cost of student and faculty time in extra hand-wiping because the brown towels absorb so little moisture means that the social cost of brown towels exceeds those of white ones. (I sympathize—my practice on this is take towel, rub, then finish drying hands on jeans!) This makes sense to me—with a captive group of users, the university is minimizing its private cost, not social cost.

Another student, an Iraq veteran, writes that the armor on the vehicles he rode in was too thin to offer proper protection to soldiers, government behavior that he claims is similar to that of the university—in this case, undervaluing its soldiers’ lives.  This seems less logical—surely the U.S. Army is greatly interested in protecting its soldiers and is willing to incur huge costs in doing so.  I hope/pray that my soldier-student is wrong.  (HT: JC.)



Waiting to Vote: $1 Billion Opportunity Cost?

I was on the public-radio show Marketplace Tuesday evening, interviewed about waiting (sparked, I assume, by lines of people waiting to vote).  I never vote on Election Day and never have to wait to vote: I take advantage of Texas’s early voting, which is quick and easy. I estimate the opportunity cost of people waiting in line on Tuesday — the value of their time — was around $1 billion.  Those resources would have been much better spent creating facilities for early voting in all states. For that sum, a lot of election workers’ salaries could be paid and polling facilities could be kept open from late October through early November.  An additional virtue is that more people might vote, and expanding democracy would be a good thing.  Who couldn’t support this reallocation of resources?



One Woman’s View of the Female Wage Gap

Jennifer Colosi runs a San Francisco executive search firm with a concentration in finance. Here’s what she wrote in to say about our analysis of the persistent female-male wage gap:

Agreed with all you wrote about wage gaps between women and men.

Why yes, women do love kids!

You are exactly right – a higher wage isn’t as important to some woman – because it comes at a “household” cost.

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Lawn Mowing Economics

As a teen Max had a great business mowing lawns. He used his hand-pushed power mower to build up a large clientele in a radius of his family’s house. When his friend and neighbor Charlie entered the business, ending Max’s local monopoly, Max didn’t have to cut his price—Charlie just expanded the radius of the client area.

Max knew he had problems, however, when he saw Charlie drive out of his garage on a riding mower. Charlie could now do four times as many lawns/day as Max. Max started losing customers when Charlie cut prices, as he could afford to (because his average cost/lawn was lower than Max’s and had a minimum with a higher output.) Not wanting to compete on price, and unable to get his parents to buy a riding mower, Max decided his opportunity cost was above his now lower lawn-mowing wage, and he quit the business to open a lemonade stand. (HT to MF)



Waiting for Free Cheeseburgers: Worth the Opportunity Cost?

There’s a long line of students snaking around the courtyard near my office. They’re queuing up to get a “free” cheeseburger, courtesy of Dave’s Hot and Juicy Tour of America, a Wendy’s promotion. A student near the current end of the line will spend 15 minutes in the sun to get the burger. A Wendy’s cheeseburger usually costs $2.99. I certainly wouldn’t be out there, even if I liked cheeseburgers.

If the student’s opportunity cost of time exceeds $12/hour, waiting for the freebie is a bad decision. But since there’s some evidence that people value time outside of work at 1/3 their wage, and since it is unlikely that many students’ hourly wage rates exceed $36/hour, standing out there is sensible on narrow economic grounds for nearly all students. But: This doesn’t factor in the likelihood of heat stroke—it’s 101º in the shade!