Communicator (communicator) wrote,
Communicator
communicator

Opportunity cost problem

I have been teaching since last May, and next week is my last week. I will miss teaching. Among other things I have been teaching economics (at a basic level) so I was interested in This metafilter discussion of the 'Dylan-Clapton dilemma'.

This is the problem. You must pick an answer using only the information provided:
"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"

Opportunity cost means 'the benefit of your second-best alternative' ie the benefit you give up when making a choice.

I have been teaching a particular solution to this type of question for best part of a year now, so I was pretty nervous about clicking on the answer (answer explained in full here and also below the cut). Luckily I did get it right. But it is interesting that economists in general get it wrong.
"when researchers asked 200 economists at the annual meeting of the American Economic Association, to answer this question only 22% got it right, a smaller percentage than if they had chosen randomly... when they posed their original question to a large group of college students, the researchers found that exposure to introductory economics was counterproductive. Among those who had taken a course in economics, only 7.4% answered correctly, compared with 17.2 % of other students."

Answer below.

The answer is $10. For the following reason:

- Going to the Dylan concert is your second best alternative (that is given in the problem) therefore the opportunity cost is the net benefit of seeing Bob Dylan which you have forgone by going to Clapton.

- Also in the problem, you know that seeing Dylan is worth $50 to you (gross benefit = 50) and seeing Dylan will cost $40 (cost = 40)

- Therefore net benefit to you of seeing Dylan is 10 (50-40)

- Therefore opportunity cost = $10
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