Question

Jones is an attorney, and Smith is a gardener. Jones, however, is better at gardening than Smith is at gardening. Essentially, he can do what needs to be done in the garden in 30 minutes, whereas it takes Smith one hour. Does it follow that Jones should do his own gardening instead of hiring Smith to do it? Explain your answer.

Short answer

It depends on the opportunity cost and financial considerations. Even though Jones is more efficient in gardening, if Jones' time is more valuable spent on attorney work, he should hire Smith to do the gardening.

Step-by-step solution

Understanding the Concept of Opportunity Cost

Opportunity cost refers to the loss of potential gain from other alternatives when one alternative is chosen. Here, when Jones spends 30 minutes gardening, he is sacrificing the income he could have earned doing attorney work in that time. First, calculate Jones' opportunity cost.

Comparing Costs

Now compare the cost for Jones to do his own gardening (which is the opportunity cost because he could spend that time working) and the cost to hire Smith. If the cost to hire Smith is less than Jones' opportunity cost, Jones should hire Smith. Otherwise, Jones is better off doing his own gardening.

Making the Final Decision

The final decision rests on Jones' opportunity cost and the cost to hire Smith. It's a financial decision whether Jones should hire Smith. Even if Jones is more efficient in gardening, if his time is more valuable spent on attorney work, hiring Smith would be the better choice.

Key concepts

Economic Decision Making

When individuals or businesses face choices about how to allocate their time and resources, economic decision making comes into play. It involves evaluating various options and selecting the most efficient and beneficial one based on the costs and benefits of each alternative. In the context of the exercise provided, Jones faces a decision between doing his own gardening or hiring Smith to do it.

For Jones, making an economically sound decision involves assessing his own productivity as an attorney versus his efficiency in gardening. Since the value of his time is potentially higher when working as an attorney, his decision should factor in the opportunity cost of gardening. This concept, central to economic decision making, allows Jones to weigh the cost of foregone legal work against the expense of hiring Smith. If the income Jones would earn from 30 minutes of attorney work exceeds the cost to pay Smith, then hiring Smith is the financially prudent choice, despite Jones being capable of completing the task more quickly.

Economic decision making also touches upon understanding market rates, the quality of services provided, and personal preferences. Sometimes, even if the cost is higher, one might opt for the service that offers more satisfaction or convenience. However, in a strict fiscal sense, Jones's decision should hinge on which option offers the highest monetary value for his time.

Comparative Advantage

Comparative advantage is a foundational principle in economics that describes an individual's or entity's ability to produce goods or services at a lower opportunity cost than others. It is not about who can complete a task the most quickly or effectively, but rather, who can perform the task at the lowest relative cost.

In our exercise, even though Jones is better at gardening than Smith—needing only 30 minutes compared to Smith's hour—this does not automatically mean Jones has the comparative advantage in gardening. To discern who has the comparative advantage, one must consider what is being given up. For Jones, an attorney, the opportunity cost of 30 minutes spent gardening is the income he would otherwise generate in his primary profession. For Smith, it is potentially less, assuming his hourly rate as a gardener is lower than what Jones earns as an attorney in the same time frame. Thus, Smith might have the comparative advantage in this situation because the opportunity cost of his time is lower.

Choices based on comparative advantage can lead to more efficient allocation of resources. In a broader sense, focusing on comparative advantages allows for specialization and trade, which can drive economic efficiency and growth.

Cost-Benefit Analysis

Cost-benefit analysis is a systematic process to calculate and compare the benefits and costs of a decision, project, or investment. It's an essential tool in economic decision making and can be applied to various scenarios from personal finance to corporate investments and policy making.

In the situation with Jones and Smith, conducting a cost-benefit analysis would require Jones to consider not just the direct costs of hiring Smith or doing the gardening himself but also the indirect costs or benefits associated with each option. For Jones, the benefit of doing the gardening himself is the money saved by not hiring Smith. However, the cost involves not just the time spent gardening but also the legal income forgone—the opportunity cost—which can be significantly higher.

To perform a proper cost-benefit analysis, Jones would need to estimate his potential earnings as an attorney for 30 minutes, the cost of hiring Smith for an hour, and any other intangible factors that may influence his well-being or satisfaction. If the opportunity cost and other subjective factors outweigh the expense of hiring Smith, then the cost-benefit analysis would suggest that it is more advantageous for Jones to employ Smith. This systematic approach aids in quantifying the trade-offs and ensures that decisions are informed by a comprehensive assessment of the financial implications involved.