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Opportunity Cost
I was stunned to read Robert Frank's NYTimes column about a recent study testing economist's knowledge of economics. Paul J. Ferraro and Laura O. Taylor of Georgia State University asked some 200 economists, many with PhDs from top-economics programs, at the 2005 annual meetings of the American Economic Association, a simple question:
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, or (d) $50.
I have a hard time believing that this is possible but 78 percent of the economists gave the wrong answer! This is not a hard question. There is no trick. Opportunity cost is central to economics, the people asked were among the best economists in the world, a large majority of them have taught intro econ and yet the correct answer was the least popular.
This is a professional embarrassment.
Test yourself against some of the world's best economists. The answer is in the extension. By the way, if you really want to learn economics come to GMU. I guarantee that your professors understand opportunity cost. We are also good on scarcity and incentives. Comments are open.
The answer is b, $10. Your next best alternative to the Clapton concert is attending the Dylan concert which has a benefit of $50 and a cost of $40 or a net benefit of $10. The net benefit is what you give up by attending the Clapton concert.
Posted by Alex Tabarrok on September 2, 2005 at 07:15 AM in Economics | Permalink
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Comments
Let's see, now. Do I net or don't I?
I think this shows that opportunity costs are NOT and easy concept.
I often have grad students take my intro exams, and they do remarkably poorly
We really need to emphasize the concept a LOT more if we want people to understand the economic way of thinking.
Posted by: The Eclectic Econoclast at Sep 2, 2005 7:58:05 AM
That was my answer, but it seemed so easy that I was really nervous about it. Can I have a PHD for that?
Posted by: josh at Sep 2, 2005 8:00:00 AM
Huh?!!? I taught econ. at Harvard for 2 years as a grad student and I guarantee at least 70% of my first-year students would have gotten that question right after one semester (and the other 30% never paid attention in class).
I really find this hard to believe. Professional embarrassment is an understatement. I sure hope there was something seriously *wrong* with the way the study was conducted (I haven't yet clicked through the link)...
Posted by: Joe M. at Sep 2, 2005 8:36:17 AM
So if the Dylan Ticket were to cost $50, there would be no opportunity cost
in going to the Clapton show. Which do you attend?
Posted by: craig at Sep 2, 2005 8:36:46 AM
You would go to see Clapton if you were willing to pay anything to see him. Your net benefit to seeing Clapton is whatever you would have paid to see him, while your net benefit to seeing Dylan is $0 if the tickets cost $50
Posted by: Bob at Sep 2, 2005 8:53:29 AM
I said $50 too; in fairness to the profession, most of them probably did what I did, which was to think that you could go to the Dylan concert for free too. Yes, I know it says "Tickets to see Dylan cost $40," but on a careless reading that could mean "...for all those suckers who don't get to see it for free."
So slag economists for careless readiing, not bad economics. Try re-wording the sentence to "Tickets to see Dylan, whom you may not see for free, cost $40." I'll bet that will generate correct answers close to 100% of the time.
Posted by: Tom at Sep 2, 2005 8:53:53 AM
That was my answer, but it seemed so easy that I was really nervous about it. Can I have a PHD for that?
My reaction, too. $10 seems so obviously right that I can't quite imagine what the logic would be behind arriving at any of the other answers. The only thing potentially tricky about the problem, I suppose, is that the free Eric Clapton ticket is a distractor and has nothing whatsoever to do with the answer. Would the the economists have gotten the aswer right if the question had been simply, "Tickets to a Bob Dylan concert are $40. On any given day, you'd be willing to spend $50 to see Dylan. What's the opportunity cost of staying home to watch TV?"
Posted by: Slocum at Sep 2, 2005 8:53:57 AM
Craig- if the Dylan ticket cost $50 it very well might no longer be your next-best alternative activity (as you derive no gain from buying the ticket and attending the concert), and so might no longer be the proper measuring-stick.
On the other hand, as others said: if Dylan and Clapton really were your only two options, you would choose Clapton as long as you place any positive value on hearing Clapton (since Dylan give you no gain). If you dislike Clapton and would rather NOT hear him, you would choose Dylan. If you were truly indifferent between hearing Clapton and no hearing Clapton (unlikely), then you would also be truly indifferent between attending Clapton and attending Dylan (as there is no net gain or loss from either activity). Unless we introduce transaction costs at some level or another...
Posted by: Joe M. at Sep 2, 2005 8:55:15 AM
Tom - I think/hope you are correct about the wording of the question. Honestly when I first read the question I was a little confused about whether or not you already had tickets to the Dylan concert. I think it is clear if you read slowly; hopefully these "top economists" are just busy people who (rationally?) chose not to invest much of their scarce time carefully reading a meaningless survey question. Hopefully.
Posted by: Joe M. at Sep 2, 2005 8:59:25 AM
Sorry for so many comments, but I meant to say: the fact that the question is worded confusingly doesn't explain all of the problem. Remember, the answers weren't evenly split between $50 and $10 -- they were more or less evenly distributed across the four answers. I don't see how confusing wording fixes this -- how do you misread the question to get an answer of $0? So I don't think you get 100% correct even with better wording.
My hypothesis stands: busy people perform poorly on meaningless tasks. If you want have 100% correct answers, buy them lunch if they get the answer correct. Now that's a study I'd like to see.
Posted by: Joe M. at Sep 2, 2005 9:04:23 AM
I had never heard about opportunity cost.. I went to read the first paragraphs of the definition on wikipedia... and then chose the correct answer! PhD for me too! ;-)
Posted by: Turuk at Sep 2, 2005 9:17:34 AM
Priorities. I remember 2 professors, one saying to me the most important thing to know is the Envelope Theorem, the other Girsanov's Theorem. Simple, profound ideas are often lost in the focus on sexy, technical ideas that separate Great Economists from the great unwashed. Hooey. As Feynman said about physics, if you can't explain it to an undergrad, you don't understand it.
Posted by: eric at Sep 2, 2005 9:36:26 AM
Since the thesis of the post is that many, many economists -- a whopping huge majority -- do not know what "opportunity costs" are, and since this blog's readers include people with less formal training in economics than a typical economist, would this post not be more readable to a majority of its actual or target readers if you included a goddam definition of "opportunity costs"?
Is the point of this blog to inform, or is it just that the bloggers wants to publicly look down their noses at everyone else?
Posted by: Peter K. at Sep 2, 2005 9:45:20 AM
Good grief.
Posted by: Mike at Sep 2, 2005 9:51:53 AM
Many of them probably didn't read the question carefully.
Posted by: Aaron Chalfin at Sep 2, 2005 10:16:57 AM
Peter K.: I discovered and understood the concept by reading the following definition:
http://en.wikipedia.org/wiki/Opportunity_cost
Posted by: Turuk at Sep 2, 2005 10:28:14 AM
Random answers imply more than not reading carefully.
Monetary motivations have historically proven ineffective in eliciting correct answers to simple logic problems. Even large monetary motivations do so among Chinese peasants.
I think that readers of this blog should know opportunity cost, or how to use google, rather than expecting it to be spoon-fed to them.
Posted by: michael vassar at Sep 2, 2005 10:36:26 AM
I have a question now: what is the opportunity cost of seeing Dylan?
I guess it requires an additional piece of information: the price you would be ready to pay to see Clapton.
Correct?
Posted by: Turuk at Sep 2, 2005 10:40:33 AM
I was one of the subjects of this study at the 2005 AEA meetings. I was on the job market and had gone to the 4th floor of the hotel to check on where my interviews were going to be. As you might imagine, I was incredibly stressed out and distracted. I was then approached by somebody who wanted me to fill out this form. I can't remember what I answered (hopefully, the right answer!), but I do remember thinking (a) this seems like a trick question, so the obvious answer is probably not the right answer, and (b) this is the last thing I want to be doing right now.
Posted by: JC at Sep 2, 2005 10:45:45 AM
Why would I pay $40 to see Dylan if I considered Dylan to be 'next-best' compared to seeing Clapton?
Posted by: Andrew Gleadall at Sep 2, 2005 10:47:03 AM
Perhaps I am getting too hung-up in the fact that this question used aged performers, but it seems to me it ignores the opportunity cost of never seeing Dylan if you see Clapton and vice versa.
Posted by: Rob at Sep 2, 2005 10:55:40 AM
I think the missing piece of information for $10 to be the correct answer is that you can still see Dylan for $50 another night. In real life, concerts are rarely played in the same place, and therefore the costs of missing the Dylan concert is not the extra $10 you have to pay, but a) the extra costs in time and money to travel to see him elsewhere, or b) (if you cannot see Dylan at all on another night) the full $50 cost that you were willing to pay to see Dylan is actually correct.
Posted by: Stephen Duncan Jr at Sep 2, 2005 11:06:35 AM
From the NYT article you also learn the shocking figure that if you are a student you were over twice as likely to get the correct answer (although still less likely than guessing randomly) if you had never taken an economics class.
One other note, I got the question right, but I wonder if I would have had Alex not empahsized 'this is not a trick'. I can imagine being confronted with a similiarly straightforward Physics question at an APS conference and overthinking it because I couldn't understand why anyone would bother with such a simple question. But, none the less, this is a question with only one right answer and I'm stunned that so many experts got it wrong. I'd have guessed it should be 80%+.
Posted by: Lou at Sep 2, 2005 11:06:36 AM
I got it wrong!. But then again thats why I am a scientist not an economist. I see the value of the clapton tickets as 50 dollars, since youd pay 50 to see dylan, but you are seing clapton instead.
Posted by: callmemickey at Sep 2, 2005 11:09:00 AM
I nearly said it was a trick question, because I said to myslef, it's not on here, the answer is -10. Then I looked it over and had to spell out what was what. Aaron Chaflin is right, the question needs to read quite carefully.
The biggest problem in teaching economics is understanding perspective and relationships. You can summarize all the theory you want, but the semantics in defining scenarios is very important.
That said, I am sure that even if half of those who got it wrong could potentially have got it right, it woul still have been a professional embarrassment...
Posted by: Desert Island Boy at Sep 2, 2005 11:09:14 AM
