Sep 11 2008
Rational behavior, opportunity cost, marginal analysis - An intro to the Economic way of thinking
Published by Jason Welker at 12:36 pm under
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WikipediaFreakonomics - Laid-Back Labor - New York Times
If you’ve spent much time on this blog, you know that I’m a fan of the boys at Freakonomics, the book that so aptly applies economic theory to the seemingly benign happenings of everyday life. In the article above the Freakonomists examine the difference between labor and leisure. I thought this article did a good job of introducing some of the basic concepts behind how economists think about the world.
As this year’s AP students begin to delve into the world of economics, one of the early topics they study will be the concept of humans as rational beings engaged in the constant pursuit of utility (the economist’s word for happiness). According to our text, “Economics assumes that human behavior reflects ‘rational self-interest.’ Individuals look for and pursue opportunities to increase their utility.”
If, as economists say, the purpose of life it the pursuit of utility, then presumably work is only a tedious but necessary means to an end, which we assume to be leisure. So why, as pointed out in the article above, do so many people willingly choose to spend so much time and money doing things like cooking, knitting, gardening, working in the yard, and other tasks that appear to be work, when they could easily pay others to do these menial chores for them, thus giving them more time for leisure? As the authors say, “Isn’t it puzzling that so many middle-aged Americans are spending so much of their time and money performing menial labors when they don’t have to?”
Where exists the line between work and leisure? This seems like an apt question to explore from an economic perspective. Here’s the author’s view:
“Economists have been trying for decades to measure how much leisure time people have and how they spend it, but there has been precious little consensus. This is in part because it’s hard to say what constitutes leisure and in part because measurements of leisure over the years have not been very consistent.
Economists typically separate our daily activities into three categories: market work (which produces income), home production (unpaid chores) and pure leisure. How, then, are we to categorize knitting, gardening and cooking? While preparing meals at home can certainly be much cheaper than dining out and therefore viewed as home production, what about the ‘cooking for fun’ factor?”
Why a professional (let’s say a lawyer) who spends 50 hours a week in his office, earning somewhere in the range of $100 an hour for his labor, would choose to spend two hours mowing his lawn on a Saturday, rather than hiring the neighbor boy to do it for him, truly poses an economic paradox.
Let’s see why: If this man’s labor is worth $100 and hour, then we can calculate the opportunity cost of mowing his own lawn as $200 plus the value to this man of the leisure he could have enjoyed by not mowing his lawn. The man probably could have hired the neighbor boy to mow his lawn for $20, which would have then freed him up to pursue his own leisure activities (reading, working out, watching a movie, etc.) during those two hours, and compared to the $200 value of his own labor the $20 seems like a bargain. So is a lawyer who mows his own lawn acting irrationally?
It would seem the line separating leisure from work has blurred in modern times. A hundred years ago an activity such as sewing or caring for a lawn would certainly have been viewed as work, but today the behavior of millions of Americans would indicate otherwise. As a science rooted in the belief that humans are rational pursuers of their own happiness and leisure, the paradox of the lawn mowing lawyer poses several interesting questions for students of economics.
Discussion Questions:
According to chapter one of our text (McConnell and Brue’s Economics, 17th Edition), “Purposeful (rational) behavior does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers. They sometimes make mistakes.”
- Is the lawyer who mows his own lawn defying a fundamental rule of economics, that people act rationally? Is he making a mistake by not hiring the neighbor boy to do it for him?
- What is meant by opportunity cost? Give an example of a decision you have made recently that involved an opportunity cost.
- How is the lawyer’s decision whether or not to mow his lawn rooted in marginal analysis? Describe a choice you’ve made recently that involved marginal analysis.
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About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
1. I don’t think that the lawyer is defying a fundamental rule of economics, as the lawyer might find mowing the lawn relaxing. Mowing the lawn gives the lawyer an opportunity to forget about his deadline and just concentrate on keeping the grass trimmed. And if the lawyer has a really huge lawn, and one of those lawnmowers that you can sit on, I am sure that the lawyer would take the opportunity to bring an Ipod or read in short intervals.
2. No because he saves 20 dollars. If the neighbor boy is not an experienced lawnmower, he might damage the lawn in some way which might cost over $200 to repair.
3. Utility is the enjoyment you get for doing something, such as watching a movie.
4. Opportunity cost is the decision to do something else when you could be working to gain something tangible. An example of this is me setting the alarm clock at 8 so that waking up at 6:30 won’t be so difficult in 2 days. However, by sleeping through the alarm clock, and not waking up until 1:30 when my mom called me from work, I lost the opportunity to wake up early, and must instead rely on tomorrow to get adjusted.
5. Marginal Analysis is looking at only the short term effects instead of the bigger picture. In my previous example, by waking up 5 and a half hours later than I intended to, I lost 5 and a half hours to do something productive, instead opting to do what I felt was the logical choice and hit the snooze button until I got tired of hitting the snooze button and turned the alarm clock off, and then went back to sleep.
6. I think that the article represents a microeconomic scenario as it involves the indiviuals decision to do menial work.
7. The lawyer’s decision to mow his lawn illustrates the individual’s economizing problem because while the lawyer would have been better off to hire someone else to mow his lawn, he wasted potential money/relaxation time to do it himself.
1. The lawyer mowing his own lawn provides him with better living conditions. Obviously that is exactly why he does that work, so he gains utility or in other words he gets what he wants. Through working in office, he gains money as utility, leisure time, he relaxes and gains the utility in that form, by mowing his lawn, he also gains utility.
2. Well it depends, by working, he gains exercise and gains utility in that form. If people higher neighbor boys for all house work, then after a while, one will no longer be able to do anything basic activities necessary for survival. Therefore, if the lawyer feels he needs the exercise himself, not hiring the neighbor boy is certainly not a mistake.
3. Utility is happiness, for example, you buy a ticket to a basketball game. Although u spent the money, u gained the opportunity to watch a basketball game which u will enjoy. Thus, u bought utility with the money.
4. Opportunity cost is the next best option that u gave up for the decision u made. For example if u can go to watch basketball game, soccer game, or volleyball game. You want to watch basketball game the most, then you also wanted to go watch soccer game, and you are not that interested in volleyball. Then by choosing to watch basketball game, your opportunity cost is the opportunity to go watch the soccer game.
5. Marginal analysis means that the decision is made at the margin, he did not take up any very detailed analysis about whether getting the boy or doing it himself will benefit him more. A marginal analysis I made recently would be choosing between two brands of chocolate and picking the more expensive one because the cover looks more tasty.
6. The above represent a microeconomic concept as it deals with specifically the opportunity cost and utility of people’s daily life.
7. what is the individuals economizing problem? -.- I think it just shows any individual got to make a lot of decisions in daily life weighing the different opportunity costs and utilities behind each decision and finally coming up to a marginal decision.
1. Under the established discipline that mowing the lawn constitutes an act of work, the lawyer is indeed defying a fundamental rule of economics by acting irrationally; however, as Dubner and Levitt well pointed out, the distinction between labor and leisure has blurred: indeed, even though the lawyer does not need to mow the lawn himself, he chooses to do so. Under the authors’ defiition of leisure–an act that you choose to do–mowing the lawn is leisure–be it a form of a stress-reliever or some sort of zen calming–meaning the lawyer is not irrational at all, as the lawyer gains utility of happiness through mowing his lawn.
2. Under the established premise that the lawyer seeks out to mow his own lawn as a form of leisure, he is not making a mistake at all: if he hires a neighbor boy to do it, the lawyer deprives himself of the utility of happiness.
3. Utility refer to the satisfaction derived from the consumption of a good or service. Beef Jerkies is one popular product that provides utility.
4. When you make a decision, you choose the one that will yield the most utility; by gving up your second best option, you incur an opportunity cost, for you must give up that second option (and possibly the resulting income). When I decided to go play tennis with my friend yesterday, my opportunity cost was watching Oceans 13.
5. The lawyer’s decision is rooted at marginal analysis, as his decision has been made at the margin, meaning that he has made his decision by observing the resulting utilty in the short run and not in the long run. Instead of mowing the lawn, the lawyer could have worked, resulting in a greater income in the future; however, speaking in the short-run, working would not have provided as much utility as mowing would have. Likewise, instead of studying for SAT, I decided to party the day before school. While studying for SAT could have gotten me into a better college and hence greater utility in the long run, in the short run, studying did not provide as much utility as partying.
6. It is a microeconomic scenario as only he (household) is affected by his decision
7. ditto daniel, what is the individual’s economizing problem?
1. The lawyer mowing his own lawn is not acting irrationally, because although the opportunity cost of him mowing his own lawn as opposed to hiring someone else to do it seems to be ridiculous, he might find enjoyment in mowing his lawn and thus increase his utility, which is not irrational at all.
2. Assuming that the lawyer views lawn-mowing as a form of leisure and not work, he is not making a mistake at all by not hiring the neighbor boy to do it for him; not only does he gain in utility, but he also benefits in physical fitness and saves the $20 it would have cost to hire the boy.
3. The economic definition of utility is the pleasure, happiness, or satisfaction obtained from consuming a good or service. An example of something that provides me with utility is movies.
4. Opportunity cost is the sacrifice one makes when one forgoes the opportunity of getting one thing in order to obtain more of another thing. Today when I decided to come home for dinner, my opportunity cost was going out with friends.
5. The lawyer’s decision is rooted in marginal analysis because he had to compare the marginal benefit of mowing the lawn- increasing utility and enjoyment- with its marginal cost- taking up his time which could have been spent engaged in other activities, such as work, which would result in earning more money. A choice I made recently that involved marginal analysis was when I decided to buy a salad at lunch. Although I would have preferred to eat something else, I chose to get a salad because the marginal benefit of not having to wait in a long line (not to mention having a healthier lunch) was greater than the marginal cost of eating something I didn’t like as much.
6. This represents a microeconomic scenario, because it is concerned with an individual person.
7. The lawyer’s decision illustrates the individuals’ economizing problem because he has a limited income, and as such, must pick and choose which wants to satisfy with his income in order to create maximum utility. In choosing to mow his lawn by himself, the lawyer is helping to save money that will go towards satisfying other wants while simultaneously increasing utility because he views lawn-mowing as a leisure activity.
1) The lawyer who mows his own lawn is not defying the fundamental rule of economics. It is merely making a mistake, according to economics. However, stepping out of economics’ boundaries, the lawyer is acting rational because that’s what people do today for leisure and exercise. I don’t think one should live the life according to the rules.
2) According to economics’ fundamental rule the lawyer is making a mistake because it cost more to mow the lawn himself than hiring a neighbor boy. However, if the lawyer experiences pleasure and relaxation from mowing his lawn, the marginal benefit would exceed the marginal cost, and this would follow the fundamental rule of economics that people act rationally.
3) Utility: pleasure or happiness or satisfaction obtained from consuming a good or service. Having dinner out with my family gives me utility.
4) An opportunity cost is the sacrifice you made for a decision you made. When I decided to go out with my friends last night, I forgot to prepare for my French lesson and as the consequence, I have to double up on my French study this week.
5) The lawyer’s decision to mow his lawn can be analyzed by comparing the marginal cost and benefit. From mowing his own lawn, he feels that the pleasure he gets from his labor exceeds the $100 per hour cost. Although it is cheaper, only $20 per hour, to hire the neighbor boy, the lawyer gets no pleasure.
I think I use marginal analysis when I shop. Since my love for shorts exceed everything, even the cost, I end up buying most of the stuff :P.
6) This scenario represent a microeconomic because it looks into a particular person’s decision instead of looking at the general population.
7) The lawyer’s decision is within his budget line; he is paying himself $200 to mow the lawn.
1. I would say that the lawyer who moves his own law is defying a fundamental rule of economics, that people act rationally. From an economic perspective, it would be much wiser for him to work for 2 hours and pay $20 to the lawn mower from his gained $200. That way he is maximizing his usage of time and money earned.
I would argue that he is acting irrational because if you conduct a marginal analysis on the two outcomes he gains a lot more with the option that he works and pays the lawn mower, rather than does the law mowing himself. If he does the lawn mowing himself, he looses the chance to make $180 and is forced to do a tough job. If he pays someone, he will gain $180 dollars and still have 2 hours of leisure away from lawn mowing.
$180 + 2 hours time away from lawn moving > 2 hours of lawn mowing and -$180
2. Yes he is because he will gain a lot more if he works and hires the boy to do it for him, rather than doing it himself. If he works and pays the lawn mower, he will gain $180 dollars + 2 hours of time away from lawn mowing. If he does it himself, he looses the opportunity to gain $180 dollars and has to sacrifice 2 hours of his time. The gain in the first choice is greater than the second, so the first choice would be more rational.
3. Utility is the satisfaction you get from a service or a product. A bed provides me utility because I can sleep well and comfortably on it.
4. Opportunity cost is when you sacrifice the gain from one option for the gain from another option. Last night I only had time to watch either a comedy or a horror movie. I chose to watch a comedy and my opportunity cost was being able to watch the horror movie.
5. The lawyer’s decision is rooted in marginal analysis because he has to pick a choice between 2 options which both yield different net values. If he chooses to stay home and mow the lawn his costs are time and money; his benefits are getting the job done, and maybe some fun. However if he chooses to hire someone instead his benefits are: getting the job done, $180 dollars, and 2 hours of leisure time away from lawn mowing; his costs are: to work for 2 hours. The 2nd option obviously yields greater gain for the lawyer so speaking rationally, the lawyer should stick with option 2.
When I woke up today I had a choice of going out to hang out with my friends or to stay home and do my homework. If I were to hang out with my friends my benefits would be: some fun; however, my costs would be: time, possibly my grades, developing a bad habit. If I chose to stay home and do my homework my benefits would be: good grades, on track with school, learning something; my costs would be: time, maybe some fun. What really matters for my future would have to be whether or not I do good in school, thus the 2nd option yields more benefits than the first. And because of that, I decided to go with the 2nd option.
6. The article above represents a microeconomic scenario because it involves the economy of households. Microeconomics is the branch of economics that that studies the economy of consumers, households, or individual firms.
7. The lawyer’s decision illustrates the individual’s economizing problem because he was presented a decision where he had to conduct marginal analysis and compare the net gains of both options. He should choose to work instead because this way he is maximizing his benefits by maximizing his income and the amount of work that gets done. By choosing this option he does have to sacrifice his own oppertunity to mow the lawn.
1) The lawyer is not defying a fundamental rule of economics because while some people may see him as irrational for doing a chore when he could be doing something “fun”, mowing a lawn is probably “fun” for him and he is doing it for his self-interest. After days and nights in front of papers and computers, looking into some green grass and doing some physical work outdoors seem pretty rational to me.
2) I don’t believe he is making a mistake by not letting a boy do it. Financially, maybe it is not the best choice, since the opportunity cost of him mowing the lawn is way higher than the boy doing it, but sometimes we have to take a step back from all the money details. First of all, is he really going to work on a Saturday? Probably not. So can we really account his opportunity cost as $200? Probably not. The most his opportunity cost can get is probably losing some reading or watching TV time. But if he chooses to mow a lawn, then his yard most likely means more to him than a book or a movie.
3) Economically, utility means “the pleasure, happiness, or satisfaction obtained from consuming a good or service”. Lots of things provide me with utility. Some examples would be a good movie, really good food, or even just simply nice clothes.
4)Opportunity cost is the opportunity lost. The opportunity cost of something is what could have been produced with the resources that was put into making that product. The opportunity cost of me replying to this blog is the time I could be spending outside or doing something else and the money that goes into every minute that I am online.
5)Before the lawyer mowed his lawn, he probably ran a marginal analysis without knowing it. If he mowed his lawn by himself, the marginal benefit would be getting some fresh air and having what he could think as “fun”, and the marginal cost would be the time he could be using to read or watch a movie. If he hired the boy, the marginal benefit would be using that time to do whatever he wants, and the marginal benefit would be the $20. Obviously the lawyer does not think of mowing the lawn as a chore, since he chose to mow the lawn by himself at the end.
I had to go through the same thing whenever I eat a snack. The marginal benefit of me choosing something like an apple would be lower calories and healthier, but the marginal cost would be it doesn’t taste as good as something say like a brownie. The marginal benefit of me eating a brownie is how good it tastes, but the marginal cost is me feeling fat and unhealthy a few minutes after I eat it. So I decide that health and feeling good about myself exceeds the few seconds of guilty pleasure I get from the brownie, so I choose the fruit.
6) The example of the man mowing his lawn is a microeconomics problem, because it is talking about a small individual’s economic scenario, not whole aggregates of the economy.
7) Lawyers might make a lot, but their income is still limited no matter how much they make. But their wants, like everybody else, is unlimited, so that’s where their economizing problem comes in. Yesterday the lawyer needed to pay his rent, and today he needs to get his lawn mowed. And tomorrow he might want to buy a Ferrari. He can’t have everything that he wants because even he needs to have a budget. So he decides to relieve his economizing problem a little by mowing the lawn himself.
I recently read Freakonomics over the summer, and find it quite interesting, especially the bizarre topics it brings up. Under the present fundamental rule of economics, the lawyer can be described as acting irrationally. This is obviously because he can just pay the lawn boy, whose opportunity cost is much less than him mowing his lawn himself. However, in real life, economics does not play so intricate a part as we think. What about the lawyer who mows his lawn just for fun? Or as a stress-reliever, or even as a hobby? Maybe he just gets a kick out of mowing, and it should not be our place, or any economist’s place, to stop him, even if it means a loss a money in the long run. So therefore, he might not be making a mistake by not hiring the lawn-boy next door, because in doing so he might be gaining his utility, or self-satisfaction, from mowing his lawn by himself, such as one would get from eating popsicles, or the like. It does involve a case of marginal analysis though, since he is obviously looking towards the short-term effects, such as gaining pleasure now from mowing, rather than looking at the long-term money he might’ve made by working instead. For example, just yesterday I made the decision of going out to eat, instead of saving money and eating at home, just because I wanted to have the immediate satisfaction of dining out, rather than saving my money. This deals with a microeconomic issue, since it is personal to him, and represents the individual’s economizing problem since everyone has their own needs and wants, and has to make the decisions that are best for themselves.
I understand what you are saying, but some people simply enjoy mowing their lawns and you could classify that as a hobby or stress reliever.
As a lawyer, I have two things to say about this phenomenon:
(1) I really enjoy working in my yard. Although if I didn’t, I would be paying the neighbor kid in a heartbeat.
(2) As a person with base economic sense, I consciously consider the fact that I COULD be earning much more regularly during my leisure time. However, this sense becomes hostile to my “utility” as soon as the work day ends. Thus, anything that helps me escape that mindset is a blessing.
Go Seattle U.!
Nice Mr. Bianchi. I’d be interested to know, AS A LAWYER, how much do you people actually make? Would you be able to tell me that?
Haha, by the way, John Bianchi is one of Mr. Welker’s best friends, so he can pick on him as much as he wants. Mr. Welker sure appreciates his extremely smart and hard working friends who read and comment on his blog! Thanks John!
Unless the lawyer really enjoys mowing his lawn, he is defying a primary rule of economics, which is opportunity cost. For the time he requires to mow his lawn, he could have made a lot more money by doing his own job. The lawyer is acting irrationally on his part because he could have paid the neighbor boy to do the work instead. Unless the lawyer likes to mow his own lawn, he could be enjoying his weekend. If the lawyer would have done his own job, he could also maximize his utility to a greater extent because he has more money to do so.
During the summer vacation, I worked at school for some money. This is a prime example of opportunity cost because in the week I took to work at school to make money, the opportunity cost could have been to spend a week relaxing and watching TV. I chose to work and make money, but I had to give up relaxing and watching TV.
Marginal analysis is the analysis of marginal benefit and marginal cost. The marginal cost of the lawyer mowing the lawn was giving up his free time and making money being a lawyer. The marginal benefit of mowing the lawn was his satisfaction, if any, he received by doing it. In a best case scenario, the marginal benefit should equal the marginal cost.
The lawyer, by mowing his own lawn, is defying the fundamental rule of economics. The rule is that people act rationally, which he is defying by doing something generally considered “home production” (or for some, even “market work”) but in time that’s meant to be dedicated to leisure, an act that isn’t rational. It is even less rational if he claims to find this a form of leisure, but as to whether it’s a mistake or not, that only he can decide, since it depends on what he values.
The opportunity cost is basically what else could he have been doing in that time, essentially the opportunity he lost. In this case it could have been him working, thereby earning 200$ in the two hours spent mowing. Similarly, I recently decided to buy a sandwich instead of hot lunch, the opportunity cost was not getting a hot meal, salad and drink, but on the other end I benefited from not having to wait in the enormous line, saving me time.
The marginal cost to the lawyer was his free time (or 200$ worth of work) and perhaps a small amount of his sanity (unless he truly enjoyed it, which I’m skeptical of), his marginal benefit was both his enjoyment of mowing the lawn and saving the 20$. So if he values the enjoyment of mowing at 200$ or free time, he made the right choice. This applies to my sandwich/hot lunch analogy as well, since the marginal cost for me was the hot lunch, salad and drink, but the marginal benefit for me was the time it gave me in which to do other things.
1. If the Lawyer mows his own lawn he has an opportunity cost with doing his job and earning money. If he hires the neighbor boy he will have to pay him, but he will be able to do his own job and make more money.
2. Opportunity cost is something you give up to do something else. This week instead of going home and studying for a test I went to basketball practice. The opportunity cost of going to basketball is not being fully prepared for my test. If I would of gone home to study for my test the opportunity cost of going home would be going to basketball practice, because it was something else I could of done. Another opportunity that I didn’t take.
While the lawyer certainely could put his time to “better” use by watching tv, etc, and pay much less to mow his lawn if he were to choose the gardener to do the work, perhaps it is the lawyer’s utility to do this work, or simply the lawyer does not see this job as a tedious and time consuming one. It is neither wrong or right; because it is the lawyer’s time that is being consumed, it is up to him to decide whether the opportunity cost of paying someone to do the work or simply doing it himself it really worth it. Opportunity cost is defined as the value of the sacrifice made to pursue another action instead. Recently, I chose to study for a Biology test instead of finishing pieces of other homework since, in my mind, it would pay off later if I was prepared for the test when I knew I could postpone my other work for the preceeding night. For me, the marginal benefit seemed better than its cost since I seemed to have gained more than I would have if I hadn’t studied. In this case, my marginal benefit was the same as my marginal cost since it satisfied me and I performed well on the test.
1. Is the lawyer who mows his own lawn defying a fundamental rule of economics, that people act rationally? Is he making a mistake by not hiring the neighbor boy to do it for him?
2. What is meant by opportunity cost? Give an example of a decision you have made recently that involved an opportunity cost.
3. How is the lawyer’s decision whether or not to mow his lawn rooted in marginal analysis? Describe a choice you’ve made recently that involved marginal analysis.
Not necessarily, he could find mowing his lawn to be relaxing and a way to take his mind away from the world of work which he for ever seems to get caught up in. It could be his way to escape. This would then mean that it is not a labour but in fact leisure, so he could be maximizing his utility.
Opportunity Cost is the cost of what he missed out on doing whilst he was mowing the lawn. For example if he payed the neighbor to do it, he could have read a book, or watched tv.
It is rooted in marginal anayalsis because he could pay the neigbour 20$ to mow his lawn, but then the meighbour may not be as experienced as a proffessinal who charges 100$ to mow the lawn, the kid could destroy the lawn somehow and it could cost over 200$ to repair.