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The Opportunity Cost Answer

07 Sep

I received about 5 responses to the opportunity cost question, and have given up hope of receiving any more. So, I have decided to post the correct answer and explanation to the problem–which no one got correct, by the way. First, a reminder of the problem:

“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

Here were the responses I received:

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

“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.”

“I guess D, because the concert you’d be missing out on is worth $50 to you.”

“Here there is no actual cost to see Clapton. However, by choosing Clapton you are “missing” Dylan and are fully willing to pay the $50 to see Dylan. Thus, the opportunity cost of going to the Clapton concert is $50.”

“The opportunity cost of the Clapton ticket must be the price of a Dylan ticket or $40.”

So, to sum up, that’s one vote for A, one vote for C, and 3 votes for D (or more precisely 2 votes for D and one for “minus D.”) The correct answer, however, is B. The opportunity cost of attending the Clapton concert is $10. Here’s why:

Calculating opportunity cost requires considering both the costs and the benefits of each scenario and comparing the net results. In the first scenario, you choose to see Clapton using your free ticket. The big question here is how much seeing Clapton is worth to you. In other words, the cost is $0, but the benefit is not specified in the problem.

In the second scenario, you choose to see Dylan by purchasing a $40 ticket, and we are told that seeing the event is worth $50 to you. Therefore, in the second scenario, you spend $40 to receive a $50 benefit, which results in a net benefit of $10.

Working backwards, choosing to see Clapton also results in a $10 net benefit if seeing that concert is worth $10 to you (since the ticket is free). Thus, if you didn’t have any interest in seeing Clapton ($0 benefit), the fact that you won a free ticket ($0 cost) wouldn’t matter, and you’d be better off buying a Dylan ticket (spending $40 to receive $50 worth of entertainment–a net benefit of $10.) If seeing Clapton was worth exactly $10 to you, then it’s a toss-up and you benefit equally from attending either show. If, however, seeing Clapton is worth more than $10 to you, you should choose to attend the Clapton concert over the Dylan concert.

Seeing Dylan: $50 benefit – $40 ticket = $10 net benefit
Seeing Clapton: $X benefit – $0 ticket = $X net benefit

The opportunity cost is $10.

Thanks for playing.

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2 Comments

Posted by on September 7, 2010 in Uncategorized

 

2 responses to “The Opportunity Cost Answer

  1. anna

    October 2, 2016 at 3:32 pm

    what is you already have the ticket of bob dylan and that costs you 40. and you can resell if for 45. Then what is the opportunity cost of going to the free one?

     
  2. Xiaofeng Liu

    October 2, 2016 at 3:34 pm

    what is you already have the ticket of bob dylan and that costs you 40. and you can resell if for 45. Then what is the opportunity cost of going to the free one?

     

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