CFA Practice Question

CFA Practice Question

Time costs, unlike money prices, differ among individuals. Therefore, ______
A. low-wage consumers generally choose more time-saving commodities than do persons with higher time costs.
B. high-wage consumers generally choose fewer time-intensive commodities than do low-income consumers.
C. there is no predictable relationship between income level and the amount of time-saving commodities chosen by a consumer.
Explanation: The opportunity cost of an hour for a high wage individual is greater than the opportunity cost of an hour for a low wage individual. Thus, the "price" of an hour for a high wage person is greater than the price of an hour for a low wage person. As a result, a high wage individual prefers not to engage in time intensive leisure activities. Instead, the individual will choose activities which are not time intensive such as eating in restaurants.

User Contributed Comments 11

User Comment
Alastair I am not sure it actually follows that rich people 'generally choose fewer' such commoditites - they just value them more highly.
Rguerra Are you suggesting that high-wage people should not read and instead eat out more often? I don´t think eating out would help me out with the CFA exam.
wollogo Alastair - they choose fewer time intensive commodities because the opportunity cost of their time is higher.

Reguerra - yes eating out would help you with your exam because you would spend less time preparing meals and more time studying.
julamo depends on how good of a meal you cook at home, or whether you eat out in a fast-food or in a fancy restaurant... Let's not get into the debate
Birdy101 take the bus or catch a taxi, might explain it better
iambroke If the opportunity cost of time for high wage individuals is so great then how does one explain the Income effect....Ie more leisure being consumed at higher wage??
jpducros good one lambroke...I made the same reasoning and would choose A. I thought that at low wage, you prefer to work more time and at high wage, you prefer to take more leisure. So at high wage, you would take more time-intensive commodity; if commodity is understood as a leisure. Where am I wrong ?
jpducros ok, I focused on the Income effect while one should focus on the substituition effect. The more you get paid, the more you work. I don't know why we shouldn't apply the Income effect here.
ezimokha Simple - For the rich man, time is money.
Sheeb Time = Money
farhan92 ezimokha's got it bang on. Think of it like this if you earn 100 an hour you are more likely to get up and be at work on time -which means staying in bed for an extra hour is worth less than 100 an hour to the person.
However, if a person earns 6 an hour he is more likely to lay in bed for an hour as staying in bed is worth more to him than working for an hour ( staying in bed is more valuable than 6).

I got this wrong but makes sense once you think about it!
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