Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 2

The Opportunity Cost of Time
When people make choices about various ways they might use their time, they take opportunity costs into account. Recognizing this fact leads to some important insights about behavior that might not be understood otherwise.
Travel Choices
In choosing among alternative ways to get to work, people will take both out-of-pocket costs and time costs into account. Studies have found that commuters are quite sensitive to time costs, especially those associated with waiting for a bus or train.1 People appear to choose between alternative modes of transport in ways that imply the cost of their time is approximately one-half their market wage. Research conducted in connection with the Bay Area Rapid Transit (BART) system in San Francisco, for example, found that fares constituted only about one-fourth of the total costs to passengers. Far more important were time costs involved in getting to the BART stations, parking, waiting for trains, travel, and getting from downtown stations to their final destinations. It is these costs that motivate most commuters in urban areas to continue to use their own cars, even when major investments are made in mass transit systems.
Childbearing
Although the approach seems odd to noneconomists, many economists have studied peoples' decisions to have children by focusing on the costs of children relative to other goods. One of the most important such costs is the opportunity cost of foregone wages for parents who choose to raise children rather than pursue market employment. Not only does this cost amount to more than half of the overall cost of a child, but it also varies significantly among families, depending on the potential wage rate that caregivers might earn. Many economists believe that rising real wage rates for women following World War II is a major reason for the significant decline in birth rates in most Western countries. For example, the birth rate (that is, births per 1,000 people) declined in the United States from 24.1 in 1950 to 13.8 in 2009. Declines in Germany, France, and Japan were even larger. Similarly, lower birth rates in Western countries in relationship to those in developing countries can in part be explained because children are "cheaper" (that is, caregivers have lower wages) in developing countries
Job Search
When people look for new jobs, they face considerable uncertainty about what openings are available. They must often invest time and other resources in searching for a suitable job match. Again, the opportunity cost of time can play a major role in determining how people look for work. For example, an employed person may undertake only those job interviews that promise significant advancement because he or she may have to take time off from work to make such meetings. On the other hand, an unemployed person may explore a wide variety of approaches to finding a job, some of which (such as checking directly with employers) can be quite time-consuming. The urgency with which an unemployed person looks for work may also be affected by whether he or she is eligible for unemployment benefits because such benefits provide a significant subsidy to further search. Indeed, econometric estimates suggest that each 10 percent increase in weekly unemployment benefits is associated with about half a week's extra unemployment.3
Why do studies of urban transit choices find that people value their time at only about half their potential wage rates? Doesn't the theory of choice imply that the marginal rate of substitution between work and leisure should be given by the full wage rate?