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Daily Archives: August 27, 2010

A Lesson In Opportunity Cost

I just started reading Robert Frank’s book The Economic Naturalist. It came out in 2007, but I have a pretty long backlog of unread books on my shelf, and my grad student budget doesn’t support buying hardcover books when they first come out. The book aims to teach basic economic principles by exploring bizarre real-life scenarios, such as:

  • Why is there a light in your refrigerator but not in your freezer?
  • Why do 24-hour convenience stores have locks on their doors?
  • Why does a new car costing $20,000 rent for $40 a day, while a tuxedo costing only $500 rents for $90?
  • Why are newspapers, but not soft drinks, sold in vending machines that allow customers to take more units than they paid for? (That one’s obvious–the returns diminish much more quickly on the information in a newspaper–read one and there’s no need to read another–whereas you might well drink 2 or 3 Cokes.)

You get the point. Well, like I said, I’ve just started the book, but it already has me thinking, and I thought I’d share an early lesson in opportunity cost.

“Suppose you won a free ticket to see an Eric Clapton concert tonight. You can’t resell it. Bob Dylan is performing on the same night and his concert is the only other activity you are considering. A Dylan ticket costs $40 and on any given day you would be willing to pay as much as $50 to see him perform. (In other words, if Dylan tickets sold for more than $50, you would pass on the opportunity to see him even if you had nothing else to do.) There is no other cost of seeing either performer. What is your opportunity cost of attending the Clapton concert?”

Your choices are:

A. $0
B. $10
C. $40
D. $50

I’m not giving you the answer today. Feel free to post an answer in the comments–and be sure to give your rationale–anybody has a 25% chance of a correct guess. I’ll keep the comments hidden and think of a prize for the winner(s) that will be announced on Monday. (And if you happen to have read the book already, you’re disqualified from entering.)

 
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Posted by on August 27, 2010 in Uncategorized

 
 
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