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A Lesson In Opportunity Cost

27 Aug

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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5 Comments

Posted by on August 27, 2010 in Uncategorized

 

5 responses to “A Lesson In Opportunity Cost

  1. Danno R

    August 27, 2010 at 6:17 pm

    It sounds to me like a negative opportunity cost. By going to the Clapton concert, you're not spending up to your $50 limit. Can I select "minus D"?

     
  2. Phil Childs

    August 28, 2010 at 4:15 pm

    Since you didn't indicate that I bought the Bob Dylan ticket, I say the answer is A. $0. If I had bought the ticket, then the opportunity cost would have been the price of the ticket.

     
  3. Wally

    August 30, 2010 at 4:19 pm

    OK, now. What is opportunity cost and why should I care?

     
  4. Traci F

    August 30, 2010 at 8:09 pm

    Tough Question! I guess D, because the concert you'd be missing out on is worth $50 to you.But I also wanted to let you know that I do read your column regularly– it's actually one of the only items in my Google Reader that I make sure to read every day. (Well, except last Friday, when I was too busy at work to even open my Google Reader, hence the response today!)I use your blog quite often to refute the bizarre claims of some of my conservative friends who oppose health care reform only because Obama likes it, and they try to rationalize other reasons to oppose it because they can't admit that the's only reason they're against it.So, thank you for taking the time to put things into words even they can understand! It means a lot to me. Even though I don't comment here, rest assured that I do spread your words through my circle of friends 🙂

     
  5. Jan Baer

    September 1, 2010 at 6:32 pm

    Alright, already – I've looked at the definitions and it would seem that the opportunity cost of the Clapton ticket must be the price of a Dylan ticket, or $40.What happens, though, if I buy a Dylan ticket instead, and perhaps the only one I can get is scalped for the $50 I'm willing to pay; isn't there still an opportunity cost, even though the Clapton ticket was free? And part of that opportunity cost must surely be my personal dignity at having wasted a free ticket to see Clapton while paying extra to see Dylan.

     

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