Saturday, September 03, 2005

Opportunity Cost

At Marginal Revolution comes this test of your knowledge of opportunity cost:
You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.
The headline story is about a rather shocking percentage of the economics profession not getting it right, but then, in comments, someone writes
I was one of the subjects of this study at the 2005 AEA meetings. I was on the job market and had gone to the 4th floor of the hotel to check on where my interviews were going to be. As you might imagine, I was incredibly stressed out and distracted. I was then approached by somebody who wanted me to fill out this form. I can't remember what I answered (hopefully, the right answer!), but I do remember thinking (a) this seems like a trick question, so the obvious answer is probably not the right answer, and (b) this is the last thing I want to be doing right now.
Thus, I'm not sure if it actually tells you anything about the economics profession, except, perhaps, that experimental methodology needs to be improved and economists are human insofar as their performance also suffers under stress.

By the way, I was patient and made sure to think through it carefully and got it right: the answer is (b), because the Clapton tickets are a sort of red-herring, it's already given that Dylan is next-best (that is, you are going to Clapton), so all you have to do is figure out the lost "utility" from not going to Dylan: maximum willingness to pay (utiity from attending): $50 - actual price $40 (what you give up) = $10 is the amount of utility in your next-best option, thus the opportunity cost.

2 Comments:

Blogger henry said...

Hey! I was going to blog about that. I would just add that Swarthmore's Ec 1 class did teach the basics pretty well despite the fact that I'm critical of it as a requirement for the major. So maybe it's not all bad.

1:22 PM  
Anonymous Battlepanda said...

Wow. That is really, really sad. And the "that question seemed like a trick question" defense is really no defense at all. After all, if one gave a similarly elemental question about vectors, say, at a conference of physicists, I bet no physics professor would be intimidated into giving the wrong answer.

7:04 AM  

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