Question

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

Short answer

In summary, it makes more economic sense for the consultant to focus on her consulting job and shop for vegetables because her high wage rate of $200 per hour means that the opportunity cost of growing vegetables is significant. Additionally, her lack of skill in growing vegetables may result in low yields and extra expenses, making it more efficient to purchase them instead.

Step-by-step solution

Identify the Earnings from the Consulting Job

Since the consultant is paid $200 per hour, it is important to consider her potential earnings if she spends her time working on her consulting job. The more hours she works, the more earnings she can make.

Opportunity Cost of Growing Vegetables

If the consultant decides to grow her vegetables, she will spend some time (let's say t hours) on growing the vegetables instead of working for her consulting job, during this time, she could earn $200t from her consulting job. It follows that the opportunity cost of growing vegetables is the amount of money she could have made if she had worked during that time.

Compare the Benefit to the Cost

As she is not good at growing vegetables, it is likely that the yield from her efforts will be low. Furthermore, she might also need to spend money on seeds, fertilizer, gardening equipment, and more to start and maintain the garden. Then we can compare the total cost of growing vegetables, including the opportunity cost and the expenditure with the cost of purchasing vegetables.

Evaluate the Economic Sense

Given that the consultant earns a high wage rate of $200 per hour, by working at her consulting job and shopping for her vegetables, she is likely to save time and money as well as ensuring better quality produce. Therefore, it makes more economic sense for her to focus on her consulting job and shop for vegetables, instead of trying to grow them herself.

Key concepts

Economic Decision Making

Economic decision making is a process that involves evaluating various alternatives to make choices that maximize benefits while minimizing costs.

Imagine a consultant considering whether to grow her own vegetables or purchase them. To make an informed decision, she assesses her earning potential, $200 per hour, against the potential cost of her time spent gardening. The economic decision making process operates on a rational assessment of the situation: the consultant calculates her opportunity cost, which is what she would forego in terms of income by opting to garden instead of consult, and then decides based on which action provides the greatest net benefit.

Such decisions are common in everyday life, and mastering this skill is pivotal. Understanding opportunity costs and applying this understanding in real-life scenarios is an essential component of effective economic decision making.

Cost-Benefit Analysis

Cost-benefit analysis (CBA) is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options that provide the best approach to achieve benefits while preserving savings.

For example, our consultant would perform a CBA by comparing the costs and benefits of growing vegetables versus purchasing them. The costs of growing her own include the time spent gardening, seed costs, equipment, and her lack of gardening expertise. The benefits might include the satisfaction of growing her own food and the potential savings on vegetables. Conversely, the cost of buying vegetables is the price paid at the store, and the benefit is the time saved and potential for buying higher quality produce. When the cost of time spent gardening outweighs the money saved from not purchasing vegetables, the CBA would suggest the consultant to buy vegetables rather than grow them.

A CBA is a fundamental tool in economic decision making, and when used effectively, it helps to identify the option that provides the highest net gain.

Time Management in Economics

Time management in economics involves the allocation of time to optimize productivity and profitability. It's about making the most out of the limited number of hours available.

In our scenario, the consultant has to manage her time between two activities: working or gardening. The principle of time management would suggest that she should allocate her time to the activity that generates the most value. Since her expertise is in consulting, and she earns a substantial amount with this work, it is efficient time management for her to continue her professional job and use some of her earnings to purchase vegetables.

This choice leverages her high earning potential and avoids the less productive use of her time. Proper time management in economics not only refers to personal productivity but also includes considering opportunity costs and the value of time in decision making.

Principles of Microeconomics

Principles of microeconomics are the foundational ideas that describe how individuals and firms make decisions about the allocation of resources, typically under the conditions of scarcity.

The consultant's choice to work rather than garden is an exemplification of opportunity cost, one of the central principles in microeconomics. By choosing to work at her consulting job, she is making a decision that involves a trade-off, prioritizing the activity that has a higher economic valuation over another. This principle also touches on the importance of specialization and trade. The consultant specializes in her consulting work and trades money for the vegetables, which others have specialized in producing.

This division of labor and specialization increases overall productivity and is a key tenet of microeconomic theory. In essence, microeconomics helps explain the behavior that individuals and businesses exhibit in the face of decisions involving limited resources and alternatives.