Question

Janine is an accountant who makes \(\$ 30,000\) a year. Robert is a college student who makes \(\$ 8,000\) a year. All other things being equal, who is more likely to stand in a long line to get a concert ticket? Explain.

Short answer

Answer: Robert is more likely to stand in a long line to get a concert ticket because he has a lower hourly opportunity cost of $3.85 compared to Janine's $14.42. His lost income from standing in line would be less significant, making him more willing to spend time waiting.

Step-by-step solution

Calculate hourly wage

To determine the opportunity cost for each person, we need to find out how much they earn per hour. Since there is no information about their working hours, we assume both of them work full-time (40 hours per week). To calculate the hourly wage, we will divide their annual income by the total working hours in a year (52 weeks * 40 hours/week). Hourly wage of Janine: \((\frac{\$30,000}{52 \text{ weeks} × 40 \text{ hours/week}}) = \frac{\$30,000}{2,080} = \$14.42\) Hourly wage of Robert: \((\frac{\$8,000}{52 \text{ weeks} × 40 \text{ hours/week}}) = \frac{\$8,000}{2,080} = \$3.85\)

Compare Opportunity Cost

With the hourly wages calculated, we will utilize the concept of opportunity cost to determine who is more likely to stand in a long line for a concert ticket. The person with a higher opportunity cost may be less likely to stand in the long line. Hourly opportunity cost for Janine: \(14.42 per hour\) Hourly opportunity cost for Robert: \(3.85 per hour\)

Conclusion

Based on the opportunity cost calculations, Robert has a lower opportunity cost of \(3.85 per hour compared to Janine's \)14.42 per hour. This implies that Robert is more likely to stand in a long line to get a concert ticket, as his lost income from standing in line would be less significant compared to Janine's lost income. In other words, Janine's time is more valuable in terms of income, making her less likely to want to spend it waiting in line.

Key concepts

Hourly Wage

Understanding one's hourly wage is crucial in making informed economic decisions. It represents how much a person earns for each hour of work. To calculate the hourly wage, you divide the total annual income by the number of hours worked in a year. Taking a typical full-time job as an example with a standard work week of 40 hours, the formula looks like this:

\text{Hourly wage} = \frac{\text{Annual Income}}{\text{Number of Weeks in a Year} \times \text{Number of Hours per Week}}

In the case of Janine, an accountant with an annual income of \text{\(30,000}, her hourly wage, assuming a 40-hour workweek and 52 weeks per year, would come down to approximately \text{\)14.42} per hour. For Robert, a college student earning \text{\(8,000} a year, it would be just about \text{\)3.85} per hour. These figures allow individuals to weigh the value of their time against other opportunities, which is particularly helpful when faced with decisions like whether to stand in line for a concert ticket or spend that time earning money.

Economic Decision-Making

Economic decision-making involves weighing various options and their associated costs and benefits to determine the best course of action. It's a fundamental part of everyday life—whether it's a business choosing to invest in new technology, or an individual like Janine or Robert deciding how to spend their time.

An important aspect of this process is understanding opportunity costs, or the value of the best alternative that must be forgone to pursue a certain action. For Janine, with a higher hourly wage, the opportunity cost of standing in line is the lost potential income from working during that time. For Robert, his opportunity cost is lower because his potential earnings are less. Economic decision-making allows us to consider these costs in a structured manner to make choices that optimize our preferences and circumstances.

While incremental benefits from an action get weighed against incremental costs, people also factor in their personal values and constraints, such as time availability or the non-monetary value they place on the experience of attending a concert.

Cost-Benefit Analysis

Cost-benefit analysis is a systematic approach to evaluating the advantages and disadvantages of a decision. It helps in clarifying the potential impacts of a decision by assigning a monetary value to all relevant costs and benefits. The main purpose of conducting a cost-benefit analysis is to ascertain whether the benefits outweigh the costs and by how much.

When applying cost-benefit analysis in the context of Janine and Robert's decision to stand in line for a concert ticket, one would first estimate the cost, primarily the opportunity cost of their time. For Janine, this is her hourly wage of \text{\(14.42}, and for Robert, it's \text{\)3.85}. Then, benefits would be considered, which in this case could include the enjoyment and satisfaction of attending the concert. If the benefit, or the value they place on the concert experience, is greater than the opportunity cost they incur by standing in line, then the decision would be economically rational.

Therefore, individuals are constantly conducting informal cost-benefit analyses in their daily lives to make decisions that provide them with the greatest net benefit. Robert, with his lower opportunity cost, is likely to find the benefits more enticing compared to Janine, for whom the financial cost of her time is significantly higher.