Opportunity Cost of Interviewing

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Jimmy is invited for an interview regarding a copier salesman position with Neff Copiers. During the interview, it is noted that Jimmy’s resumé shows his previous but recent employment as a lawyer and the interviewers are curious why he would want to switch into sales. From their standpoint, going from a legal career into copiers’ sales seems like a demotion.

Upon making his case, Jimmy takes the chance to analyze his decision from a cost-benefit analysis standpoint. He admits that he doesn’t have traditional sales experience, which would definitely be a significant cost to Neff copiers, if he gets employed by them. The tradeoff is that his skills as a lawyer are transferable to a sales job because it still involves “selling” to different people. His argument is essentially that the skills he gained as a lawyer are general, human capital, which can be transferred to a more traditional sales role.

Before leaving, he decides to come back and make his case using the foundational economic concept of opportunity cost. While they wait to interview more candidates, they are giving up that opportunity to see if he can really do it. When hiring candidates, there are a variety of quasi-fixed costs, and many students don’t recognize that the cost of hiring a worker goes beyond their wage. The second half of this scene provides and excellent chance to explore the opportunity cost of not only the missing salesman, but also the two managers who could be doing other things with their time. Jimmy’s story about his experience with copiers is an attempt to make the opportunity cost of waiting seem more real to the two managers.

Once Jimmy gets the job he highlights how dumb the two are because they know nothing about him. He argues that there they haven’t done their due diligence in hiring because he could be a crazy person. This level of asymmetric information in labor markets is why the search process can take longer than traditional competitive models suggest.

Looking to emphasize jus the human capital aspect and transferability of skills? Check out the clip that includes only the beginning of this scene.

See more: Asymmetric information, Better Call Saul, cost benefit analysis, general human capital, hiring costs, human capital, interviewing, labor, opportunity cost, search costs, skill transferability, specific human capital

Walt’s Credible Threat

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To end the series, Walter needs to find a way to get his money to his son, but he knows that the federal government would confiscate the money if he does it himself. Instead, he seeks help from his former business associations, Elliot and Gretchen Schwartz. He asks them to launder the money through their business so that it appears to be a charitable donation. The Schwartz’s agree, but because he’ll die soon, Walter has no guarantee that they will actually go through with the donation.

Walter tells the Schwartz’s that he’s hired “the best hitmen” that he could find and that if the money is not donated to his son shortly after his son’s 18th birthday then Elliot and Gretchen will be assassinated. In order for such a threat to be credible, Walter hires Pete and Badger to stand outside the house and point laser pointers at the two of them to have them believe they were actually snipers. Walter’s persona leads to his credibility as well.

See more: asymmetric information, credible threat, game theory, imperfect information, incentives, insurance, opportunity cost, risk averse, strategic behavior, ultimatum game

Macroeconomics · Supply and Demand · Trade · Walter

Demand for Meth in the Czech Republic

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Lydia presents Walter with the opportunity of expanding into a new market (the Czech Republic). Lydia goes further and points out that entry should not be difficult given Walter’s high-purity “blue” methamphetamine and the inferior alternatives available there. Also, it is worth noting that such overseas expansion would not have been possible without Lydia’s expertise regarding global supply chains.

See more: comparative advantage, demand, elasticity of demand, elasticity of supply, expansion, exports, intra-firm trade, market entry, middleman, monopolistic competition, multinational enterprise, opportunity cost, product differentiation, trade barriers, transaction costs

Costs & Production · Jesse · Saul · Skyler · Walter

Specialization

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This clip represents a wonderful account of all the moving parts of Walter’s methamphetamine enterprise. Walter and Jesse cook, Lydia arranges and oversees the international shipments of methamphetamine, which are disguised as shipments of various chemicals between the subsidiaries of the multinational enterprise she works for, Todd coordinates the transportation operations, and Skyler is in charge of accounting and money laundering. Here, the division of labor and the comparative-advantage based specialization is what makes their enterprise successful. If one or two individuals tried to run the same operation (like when it was just Jesse and Walter), they would not be able to produce as efficiently. The downward sloping portion of the average total cost curve is the area where the benefits of specialization outweigh diminishing returns from adding additional workers.

See more: comparative advantage, opportunity cost, specialization, division of labor, average costs, accounting, labor

Behavioral & Game Theory · Foundations

How Big Does it Have to Be?

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Skyler takes Walter to a storage area she has rented and shows him the giant pile of money he has made from his meth business. She then asks him “How much is enough? How big does the pile have to be?” Walter appears to have the same determination to earning revenue, but Skyler recognizes that her utility has diminished. The first thousands that Walter brought in may have excited her, but at this point it has become a hassle and it doesn’t seem like another dollar will really change her happiness level.

See more: diminishing returns, income effect, leisure, opportunity cost, scarcity, tradeoffs, utility

Behavioral & Game Theory · Jesse · Walter

Inertia

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Walter stops by to see Jesse. Reminiscing about the start of their partnership, they cannot help but wonder about sticking with the old recreational vehicle (RV) even when there was enough to replace it. While the RV served them well in their first attempts to cook methamphetamine, the two did not upgrade until they started working for Gus Fring. The ownership/endowment effect underlines the scenario in which some people are unwilling to exchange something that they possess for the same amount of money that they would pay for it (if not owning it). Walter and Jesse loved the RV even though it had, and brought them, many problems. From a rationality standpoint, they may have been too concerned with the sunk costs that they have incurred.

See more: cost benefit analysis, opportunity cost, rationality, status quo bias, sunk cost

Foundations · Labor · Supply and Demand · Walter

Truck for Cash

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Walter drives to the desert to hide the cash generated by his methamphetamine enterprise but he runs out of gas. As he rolls one of the money-full barrels, he comes by a house and asks to buy the truck sitting in the driveway. Initially, the truck is not for sale but after he offers the man a large stack of money this changes. Next, we see Walter load the barrel in the back of the recently purchased vehicle. Each person/business has a reservation price at which they’re willing to sell products or services. For this lucky resident, it appears $10,000 was at or above his reservation price. If his reservation price was lower than $10,000 then he would hear producer surplus.

See more: exchange, incentives, opportunity cost, producer surplus, reservation price, supply, transaction, willingness to sell

Behavioral & Game Theory · Labor · Walter

What About the Money?

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Ed visits and cares for Walter. As Ed prepares to leave, Walter offers him $10,000 to stick around for two more hours. Ed takes the offer but only for one hour and the two start playing cards. Based on the earlier exchange, Ed’s reservation price for each hour is above $5,000 but below $10,000.

See more: opportunity cost, labor, supply, moral hazard, willingness to sell, reservation price

Behavioral & Game Theory · Market Structures · Saul

Meth Lab in the Basement

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Controversial lawyer Saul Goodman is trying to buy back Jesse’s house. Negotiations start and seem to unfold well until the parties disagree about the sale price. The couple ask for $875,000 but Saul’s client offers only $400,000. The couple and their counselor feel offended by such an offer and, while mentioning that the meeting was a complete waste of their time, start walking out of the room. They stop once Saul mentions the methamphetamine laboratory that used to be in the basement. This unpleasant, but key attribute is purposefully hidden from the buyer to keep up the value of the house. However, in this case, the prospective buyer seems to have done his homework. Unfortunately, in many of today’s transactions, the information held by sellers is not available to buyers and vice versa. In cases where such information gaps persist and are systematic, markets unravel and ultimately fail.

Also, note that upon introducing himself, one of the sellers immediately recognizes Saul as “the lawyer on late-night television.” This is because of his catch-phrase “Better Call Saul”, which is present in all ads involving his business. Differentiation is a key feature of markets in which many of today’s sellers and buyers interact. Together, these traits outline some characteristics of monopolistically competitive markets.

Finally, it is worth mentioning that Mr. Gardiner, the couple’s counselor, is ardent to get right to business. This leads Saul to remark, “I get it. Flat-fee clients, am I right?” This arrangement incentivizes Mr. Gardiner to service his clients as fast as possible and therefore maximize his hourly pay. The more time he spends with his clients, the lower his hourly pay (since it is a flat charge), and the higher his opportunity cost.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)

See more: asymmetric information, incentives, incomplete information, information, monopolistic competition, negotiation, opportunity cost, product characteristics, product differentiation, profit maximization

Foundations · Gus · Walter

Not Worth the Money

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It’s time for Walter to quit so he stops by to visit Gus Fring. Gus wants to offer Walter 3 million dollars to keep making his blue meth for 3 more months, but even that amount isn’t worth it to Walt. Walter is trying to piece his life back together and believes that continuing to produce his blue meth isn’t worth the amount he’s giving up. Walter admits to Gus that he has more money than he knows what to do with. Even for the wealthy, there’s diminishing returns to acquiring more income.

See more: cost benefit analysis, diminishing returns, exchange, opportunity cost, tradeoffs

Foundations · Jesse · Labor · Walter

Uprooting Your Life

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Tuco is getting worried and suggests that they all move to Mexico so that the government will stop tracking them. Walter and Jesse aren’t keen on this idea because it means they’d have to give up their family, and that’s a cost Walter isn’t willing to make, even for lots of money. The whole reason he started making meth was to support his family, but Tuco doesn’t seem to understand the issue. He suggests that he can just get another family, implying they are substitutable.

See more: cost benefit analysis, immigration, migration, opportunity cost, psychic costs, substitutes

Foundations · Jesse · Walter

Wasting My Time

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Tuco shows up in a junkyard expecting to purchase 2 pounds of meth from Walter and Jesse, but the two of them only brought about half a pound. Tuco isn’t happy because he’s wasted his time coming out for such a small quantity and isn’t too keen on their excuses. He docks part of their pay for “wasting his time.” All of our actions, including taking time to do something, has costs even if the price is zero. People often forget the value of their time, but not Tuco.

See more: opportunity cost, resources, scarcity, time, zero price

Costs & Production · Jesse · Walter

Risk vs. Reward

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Jesse brings in the revenue from the first batch of meth, and Walter is less than impressed with the amount of money that has come in. Walter had made a pound of meth (16 ounces), but Jesse has only sold 1 ounce because he’s selling it directly to users. Walter isn’t happy with the payoff because he feels the risk he is taking by breaking the law should result in a lot more profit. The two brainstorm ways to sell in larger quantities, but it turns out they had earlier killed the one person they knew who would be buy in bulk. By selling in larger quantities, the two can lower their average fixed costs (economies of scale), but it also means that they’re going to have to find a partner to do that because Jesse doesn’t have a big enough footprint to sell that much dope.

See more: average costs, comparative advantage, division of labor, economies of scale, fixed costs, middleman, opportunity cost, production, profit, specialization, supply chain, total costs

Foundations · Jesse · Macroeconomics · Trade · Walter

Let’s Make a Deal

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Walter tracks down his former student, Jesse, with the intention of collaborating with him in the production of methamphetamine. Walter’s intentions become obvious once he starts revealing that the Drug Enforcement Agency (DEA) has apprehended Jesse’s former business partner. Walter goes further and adds, “But you know the business and I know the chemistry. I’m thinking … maybe you and I could partner up.”

While Jesse has performed both tasks in the past, there is little doubt that Walter, because of his chemistry knowledge and perhaps better task-management skills, is more productive at making methamphetamine as well as distributing it. Even though Walter has absolute advantage in cooking and distributing methamphetamine, the logic of comparative advantage tells us that Walter and Jesse should collaborate. More specifically, Walter should cook while Jesse should distribute/sell the methamphetamine.

Incentives, and how individuals respond to incentives, represent another key economics concept. In this clip, Walter’s offer for a partnership deal comes with a catch:

Jesse: “You wanna cook crystal meth? You. You and me.”
Walter: “That’s right. Either that, or I turn you in.”

Walter threatens to inform the DEA about the methamphetamine business if Jesse chooses not to join the partnership. Here, Walter is encouraging some action (joining him) by issuing a threat (turning Jesse in). Their interaction represents an ultimatum game, in which Walter’s threat is an example of a negative incentive.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming).

See more: absolute advantage, comparative advantage, credible threat, credible threat, division of labor, gains from trade, game theory, incentives, opportunity cost, specialization, tradeoffs, ultimatum game