Thursday, June 17, 2010

Can you recognize opportunity costs?

QUIZ from Ferraro and Taylor:
Select the Best Answer to the Following Question:
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
D. $50
Have an answer? Now try this one:
Select the Best Answer to the Following Question: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 minimum amount (in dollars) you would have to value seeing Eric Clapton for you to choose his concert?
A. $0
B. $10
C. $40
D. $50
Have an answer? Scroll down.









The answer to both is (of course?) B.
A study polled PhD economists and found that only 22% got the first right, and about 40% got the second right. Year of degree, quality of school, etc., were insignificant in explaining this. Only significant finding was that micro theorists were better than all other groups, and macroeconomists were indistinguishable from undergraduates who NEVER took an econ course!
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4 comments:

  1. AnonymousJune 17, 2010 at 5:37 PM

    Using this logic, the opportunity cost of attending college is not the tuition, books fees, and foregone income given up, but rather the consumer surplus that could have been generated from spending the tuition, book fees, and foregone income on other goods. How wonderful. The cost of going to college is lower than I had thought.

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  2. wayne shahAugust 18, 2013 at 6:26 PM

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  3. UnknownSeptember 9, 2014 at 10:23 PM

    Is there any evidence that the general public is getting better at identifying opportunity costs? A more financially savvy citizenry might begin making some very different decisions that could affect lots of industries, especially ones where the price had been historically accepted "just cause" and there didn't seem to be a lot of other closely related opportunities to spend those funds, like education.

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  4. Brandon ShawOctober 21, 2019 at 8:37 AM

    A real world example of opportunity costs that I encountered was in choosing between paying down my car loan or investing in mutual funds. My car loan was financed at 2.9% interest. My mutual fund options could have earned me between 5-9% annually. While many people are driven to pay down debt as quickly as possible, I opted to invest instead. The ROI from mutual funds was at least 2.1% higher than what I would recoup from avoiding 2.9% interest on my car loan.

    The same concept applied to my decision not to aggressively pay down my insanely low-interest mortgage, instead opting to pay on student loans first - those were two percentage points higher in interest.

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