Thursday, September 02, 2010

Are you smarter than an economist?

Supposedly almost 80% of 200 economists surveyed at their annual meetings got this multiple choice question wrong:

"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?"

Is the answer $0, $10, $40, or $50?

No googling this, people. Give me your thoughts in the comments.


Kindred Winecoff said...

Am I missing something (I'm not an economist, tho I sometimes play one on blogs), or is this simple? The opportunity cost of an action is the foregone benefit by choosing another action. In this case it is:

$50 (value of Dylan) - $40 (cost of Dylan) = $10 (consumer surplus)

You should go to Clapton only if its value to you is at least $10. Otherwise, buy the Dylan ticket and don't look back.

PeeDub said...

I agree.

Angus said...

"don't look back" LOL, I like it.

HBanan said...

$10. Also, since you asked for "my thoughts" I will also add that my first thoughts were: this is hard, I don't understand, and you are mean. I took Econ in high school and got my worst grade in that.

I would give the Eric Clapton ticket away and go to see Dylan. I don't even know what Eric Clapton has sung, and Dylan tickets at $40 are a great deal. I might pay up to $20 to see a strange singer IF my friends are also going and invited me, but if it's just me by myself then I would not pay more than $5, the student price for the Duke University Performances.

David said...

When they say the ticket to see Dylan "cost $40," do they mean that the "price" is $40.

If $40 wasn't an answer, I'd choose $10, which is wrong because the answer is $40. If they mean the "price" of a Dylan ticket is $40, then the answer is $10.

Norman said...

I agree with Kindred Winecoff's assessment.

It says that "tickets to see Dylan" cost $40, not "seeing Dylan" costs $40. To get the ticket you have to give up $40, but to go see Dylan you also have to give up the other concert. So the ambiguity David suggests isn't a problem.

If you would normally be willing to pay more than $10 to see Clapton, Then you are better off using the free tickets than buying Dylan tickets and going to that concert. If Clapton isn't worth $10, Go to Dylan.

Michael said...

$50. Enjoying a consumer surplus does not galvanize the selling price.

Kindred Winecoff said...

Michael -

I value a Pepsi at $1. I value a Ferrari at $100. By your rationale, I should spend all my money on Ferraris, regardless of how much they cost.

Of course benefits must be net of costs.

Unknown said...

80% I call shenanigans on that figure. If Cost and Choice isn't canon, it should be, and even if it shouldn't be, even my ESL bride was able to get through it during a longish bath.

I don't know what fraction of KPC readers are economists (or wannabees), but the answer is so blatantly obvious that if I were to give it, I'd consider it a spoiler, so I'll follow the SMM and keep my yap shut.

Jeez. It's almost like you'd think economists were more concerned with... I dunno... math or something than with economics.

Angus, my man... you gonna make it back to GMU sometime this year for a wee visit or what?

Unknown said...

I'm with Tyler on this one. I said $50 as well, for the same reason. I've always thought of opportunity cost as a gross value.

It's almost like you'd think economists were more concerned with... I dunno... math or something than with economics.

At the risk of sounding a little blunt, I'd say that economists are concerned about economics, which is to say human decision making under constraints, and not hair-splitting semantic arguments. If you make the correct, optimizing decision after having been given the ticket to the Clapton concert (which I think 95%+ of economists would), then what you call an intermediate step in the calculation seems like a total waste of time.

Anonymous said...

The opportunity cost is zero. I'm not giving up anything to see Clapton at all. Dylan is only my next-best alternative, not a better or equal alternative.

Then again, I'm not an economist, but that would be my best guess. Note that I'm assuming the language "next-best" implies that Clapton is my best option; that is, I want to see Clapton more than Dylan.

Anonymous said...

$50 Your opportunity cost is the VALUE of what you COULD be doing. You are willing to pay $50 for a Dylan ticket then seeing Dylan is worth $50 to you. You are not paying the $40 by going to the Clapton concert so it is irrelevant.

B. Rule said...

Red herrings everywhere. $50.

Tom said...

My answer is $10, with caveats.

First, this: the Clapton ticket has no resale value? !! In what universe can one not scalp tickets? Hrrrumpf.

Second, only the price of the Dylan tickets was given. The value-to-me could be higher or lower. You have to assume value=cost to do anything with these numbers. Same thoughts about the Clapton ticket.

If I spend $50 on Dylan, I am even -- no cost; no gain (WTF?). If I go see Clapton, I am $40 ahead, having paid nothing. But, if it were possible to scalp the Clapton ticket for $40, I (toss a coin and choose to) see Dylan for $10. That's the opportunity cost.

Michael said...

Kindred Winecoff-

You're right. I was wrong. The opportunity cost in this case is what you'd get for free with the Dylan ticket - $10.

I tried to answer this without reading what other people wrote for fairness. I then read your first post, and having slept on it, come around to your side.

aub said...

Tom: "the Clapton ticket has no resale value? !! In what universe can one not scalp tickets? Hrrrumpf."

It's probably NC where tickets must be sold at face value (and the face value here is zero).

So you give the ticket away for free but sell the paper clip attached to it for $40. Therefore, the OC to see Clapton is $50.

MaxSpeak said...

The degree of confusion and difference of opinion says more about the precision of the concept than the acuity of the respondents.

Kindred Winecoff said...

To all you $50 people: suppose you valued Clapton at $49. Should you go to Clapton or Dylan?

Opportunity cost is only useful as a decision rule. In order for it to make any sense as a decision rule it has to be net of real costs. Otherwise, the concept is completely useless. (And I think demand curves slope upwards.)

Think of it this way. opportunity costs are usually presented as "gross" benefit because the real costs are equivalent. So a textbook question will say something like: the opportunity cost of spending $1 on a Pepsi is that you cannot spend *that same dollar* on a Coke. Here, the $1 is being subtracted from both sides, so you can look at the gross benefit to find the right answer. But that's only because of the structure of the question.

This example isn't like that. Another way of phrasing this example is "What is the opportunity cost of seeing Dylan?" It's clearly Clapton + $40. So the opportunity cost of seeing Clapton is Dylan - $40. Or, $10.