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Opportunity cost: The Eric Clapton and Bob Dylan Problem.
March 4, 2012 9:21 PM   Subscribe

Opportunity Cost: The Eric Clapton and Bob Dylan Problem. Think you understand the fundamental economic concept of opportunity cost? Answer this: "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 (because he's so cool!). 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"

Reminiscent of the difficulties that mathematicians ran into with the Monty Hall problem, -- when researchers asked 200 economists at the annual meeting of the American Economic Association, to answer this question only 21.6 percent got it right, a smaller percentage than if they had chosen randomly.(spoiler)

"Worse, when they posed their original question to a large group of college students, the researchers found that exposure to introductory economics instruction was strikingly counterproductive. Among those who had taken a course in economics, only 7.4 percent answered correctly, compared with 17.2 percent of those who had never taken one."

According to Robert L. Frank, the dismal results suggests that most students seem to emerge from introductory economics courses without having learned even the most important basic principles. (spoiler)

Definition of opportunity cost here and here. But sadly, these definitions aren't deep enough and reflect flaws in most economics textbooks:

"While the definitions given in the texts we reviewed are correct, they are
terse and rely on examples to help the reader gain a deeper understanding of the
term and what is meant by “value” or “benefit” of the next-best alternative.
However, most texts use one-dimensional examples – examples that only imply
foregone benefits of an alternative activity. For example, to describe opportunity
cost, six of the nine books discuss the reader’s opportunity cost of attending
college or taking a college course, or a hypothetical example of a college athlete
who could be playing professional sports and earning a large salary rather than
attending college. In all but one of these six textbooks, the opportunity cost is
simply the foregone benefit of the next-best alternative (e.g., foregone wages). In
only two of the nine reviewed textbooks were the opportunity cost examples rich
enough for the reader to realize that one must consider both benefits and costs of
the alternative activities. Based on these textbook examples, it is not surprising
that fewer than 1 in 10 students with exposure to introductory economics could
determine the opportunity cost of attending the Clapton concert in our question."

Quick explanation and solution to the Eric Clapton-Bob Dylan problem (spoiler).
posted by storybored (137 comments total) 27 users marked this as a favorite

 
In the ideal world of spherical economic agents operating in a perfect vacuum, one should be able to consume both products simultaneously.
posted by Nomyte at 9:25 PM on March 4, 2012 [7 favorites]


Go see Bob Dylan, dumbass.
posted by Nahum Tate at 9:26 PM on March 4, 2012 [70 favorites]


The spoiler page actually contains an important detail in the problem description: the Clapton ticket has no value to you, in addition to no resale value.
posted by JumpW at 9:26 PM on March 4, 2012 [21 favorites]


I saw Bob Dylan once, about 5 years ago. I'm a huge fan, and the ticket was free, and I absolutely hated it.

On the other hand, Eric Clapton is a racist.

Two similar options is not freedom of choice. Do something else.
posted by Sys Rq at 9:28 PM on March 4, 2012 [9 favorites]


I roadied for Opportunity Cost in '89, man.
posted by lore at 9:29 PM on March 4, 2012 [36 favorites]


Hrm. I have no training in economics whatsoever, but now that I know the answer I really want to say there must be a better way to phrase the question. Then again, it seems really difficult to conceptualize what "opportunity cost" means, and I guess that's a technical question for economists. As it is, to those who don't know what "opportunity cost" means and aren't familiar with the term, it just seems like unnecessary obfuscation. Wouldn't it make more sense to say something like "how much are you giving up, expressed in dollars, if you just go ahead and attend the "Eric Clapton concert?"

Of course, it's still a trick question, because "your mortal soul and earthly happiness" cannot be expressed in dollars.
posted by koeselitz at 9:32 PM on March 4, 2012 [7 favorites]


As Yoram Bauman says, opportunity costs in microeconomics dictate that the worst thing you can be offered is a Snickers bar and an identical Snickers bar. When you operate in that environment, well, it would be easy to get confused.
posted by gracedissolved at 9:32 PM on March 4, 2012 [4 favorites]


Wait, I remember this from the hint book. If you TICKLE CAT WITH TICKET, the cat coughs up the Bob Dylan ticket and a hairball, and then you can USE HAIRBALL ON ROADIE to get past him into the Eric Clapton concert after Bob Dylan has finished his concert and gone home to bed.
posted by No-sword at 9:32 PM on March 4, 2012 [49 favorites]


Yes, but what if you have No-sword.
posted by storybored at 9:34 PM on March 4, 2012 [1 favorite]


You guys are making even the philosophers look good.
posted by joe lisboa at 9:36 PM on March 4, 2012 [7 favorites]


uhhh.... so now I read the spoilers, which were exactly what I thought? Why is the opportunity cost problem any problem at all?

Given that the Clapton tickets are worthless to you, and the Bob Dylan tickets are worth $10 less than you pay for them... why is this an issue? (Damn, why do most people say it's $50?!?!)

I was expecting something devious like Monty Hall - which is a MUCH harder problem - it took me the better part of an hour to be convinced but I've talked to people who were NEVER convinced by the right answer...!

Why does anyone, ever, come to $50?

It's a strange question, really - like, why is the Clapton concert even there, if it's worthless to you? You might as well ask what the opportunity cost of staying home is!
posted by lupus_yonderboy at 9:36 PM on March 4, 2012 [12 favorites]


We are assuming perfect information, yeah? Because I saw Dylan in Melbourne and he was shit, and then I saw him at Glastonbury a few years later and he was great.

Is it going to be a shit Dylan gig, or a great one?
posted by pompomtom at 9:36 PM on March 4, 2012 [3 favorites]


Can I go with Leonard Cohen?
posted by You Should See the Other Guy at 9:37 PM on March 4, 2012 [13 favorites]


I'd probably look at the two artists, try to gauge how much either of them tour (and come to my area on a tour), and weigh that against how old they are and how likely they are to die before my next opportunity to see them again and go see the one which I would be least likely to get another chance to see.

Or I'd end up staying home and watching stuff off the DVR, because I'm frequently lame like that.
posted by hippybear at 9:39 PM on March 4, 2012 [1 favorite]


Depends. Is Clapton playing, like, 'Spoonful' and 'Badge'? Or is he playing 'Wonderful Tonight'?
posted by shakespeherian at 9:40 PM on March 4, 2012 [8 favorites]


Why does anyone, ever, come to $50?

I think it's a trick in the framing of the question. Implicit is that the Clapton concert has a $0 value for the consumer, since the only reason it's in the decision set is that the ticket was free. Once someone sees that the Dylan concert is valued at $50, they say, voila, $0 value versus $50, there's your answer - but forget to net out the cost.

Getting $50 just means you're forgetting the final step. Getting $0 or $40, to me at least, represents true cognitive bias/ignorance.
posted by downing street memo at 9:41 PM on March 4, 2012 [2 favorites]


The question is poorly expressed in a manner to clearly define the 'opportunity' and if it was more clearly expressed people would have no problem quantifying the opportunity.

I got the right answer but only because I knew this would be a poorly phrased question problem.

You have to define an opportunity to see BD as a single shot event valued at $50 and they do not clearly do that in the question.

Are you meant to assume that seeing EC has a $0 value?
Are you meant to assume that BD will NEVER tour again?

I'm seeing the opportunity of having a cheap night of entertainment. Try explaining that to an academic. Economists can do math but they have problems expressing things unambiguously.
posted by vicx at 9:42 PM on March 4, 2012 [5 favorites]


I said $10, because I'm not stupid.
posted by planet at 9:44 PM on March 4, 2012 [2 favorites]


Man was I relieved to get it right.

It doesn't matter what the value of Clapton is. The question is asking the cost of going to Clapton -- not the benefit. You are giving up Dylan, which generates $50 in gross benefits. But you can only attend Dylan by buying the ticket at $40. So the net benefit is $10. That's what you forego if you go see Clapton. So long as you get at least $10.01 in gross benefits from Clapton, that's what you "should" go see. (if you want credit for this one on the test I mean).
posted by scunning at 9:49 PM on March 4, 2012 [6 favorites]


It doesn't matter that there's no value set for the Clapton show. It doesn't even matter that the ticket is free. There are two types of costs for seeing the show: real and opportunity. Given that real costs are zero, the only costs are opportunity costs. If the intrinsic value is more than $10, you'd see Clapton. If the intrinsic value for sitting at home with your thumb up your ass is more then $10, you'd do that too. But that's irrelevant to figuring out the opportunity cost for NOT seeing Dylan.
posted by supercres at 9:50 PM on March 4, 2012 [4 favorites]


Well taking the specifics out of it, and just saying $40 for your first choice (A) when you'd be willing to pay $50, vs. Free for a decent choice (B), my cheap ass self also factors in all sorts of stuff like "have I seen either of these people before?" If A yes and B no then I am definitely going with B, if B yes and A no then it depends on if $40 is a lot of money to me right now, yes it is B, no it is A. If I have seen both A and B, then it depends on the scale of intensity and commonality of the experience between the two, if it was say (for me) $40 to see Tom Waits vs. Free to see Bob Dylan then I have to say, as much as I like Dylan (and I do), you'd have t PAY me to forgo the Waits concert.... pay me A LOT.

This is why these things are harder then just breaking it down to numbers, emotions (which are valid) also play a complex role
posted by edgeways at 9:50 PM on March 4, 2012


Are any of those answers really right? The opportunity cost is the cost of foregoing "seeing Bob Dylan and having $40 less money." But that's not the same thing as $10.
posted by escabeche at 9:50 PM on March 4, 2012 [5 favorites]


Jinx, scunning.
posted by supercres at 9:50 PM on March 4, 2012 [2 favorites]


Everything other than the numbers is a red herring, guys. How much you like Dylan, how often he plays, whether he'll never tour again... All that is tied up in the $50 value YOU (the theoretical "you") have placed on seeing him. The $50 is your total valuation on seeing Dylan, inclusive of emotions, opportunity, etc.
posted by supercres at 9:53 PM on March 4, 2012 [15 favorites]


I have worked with and know several academic economists...I am convinced that the entire field and discourse was born during a drunken argument among a bunch of nerds late one night decades ago while getting food after a night of binge drinking in Chicago.

There are so many rules and assumptions prior to making any argument, that the problem no longer exists in the real world. Think Prisoner's Dilemma. Think of this whole opportunity cost problem. The ridiculous math. Everyone is tweaking everyone else. Each paper is a minor twist on part of another paper. And the other department heads at the University can't really cast them out because they don't get it, but it's Econ and we need that right? And look how often they publish! There is so much tweaking and incest, that it is no wonder everything has to be wrapped in LaTeX.

And people wonder why most of these Economists missed most of the major economic events of the past few years.

And you know what, this paper just proves it...I have read and re-read the definition of opportunity costs, and willingness to pay, and surpluses....I still don't understand exactly why it is that nobody should pay for public transit...or airline tickets....I don't even understand how much I am willing to pay for a cheeseburger...or if I am rational..or how much my transactions cost..

....And you know why, because if you really dig deep....if you follow the footnotes back past Glaeser to Coase to Stiglitz to Pareto....if you just keep going further back....you end up at that original drunken argument one night outside Wiener Circle that made no sense in the first place.
posted by This_Will_Be_Good at 9:55 PM on March 4, 2012 [34 favorites]


So you then subtract what you would pay for Clapton vs what you'd pay for Dylan and you get your OP cost, but that is not the necessarily the answer given... If you'd normally pay $45 for Clapton but $50 for Dylan and you get the Dyan tickets for $40 the suddenly you are at $-5 Op cost. But I still think it is more than a static cost, benefit ratio and that it is much more dynamic which imo is why economics always seems to fall on it's face, people are complicated and change from moment to moment.
posted by edgeways at 10:00 PM on March 4, 2012


Wow, the Monty Hall problem always made sense to me, but I can’t even start to wrap my head around what this is trying to say.
posted by bongo_x at 10:01 PM on March 4, 2012 [1 favorite]


OK, now which one, if transported back to 1000AD, could find a niche for himself in whatever society he found? What if said society was run by five-year-olds hell-bent on destruction, but Eric or Bob had an RPG and 100 grenades?
posted by not_on_display at 10:02 PM on March 4, 2012 [4 favorites]


a free ticket to see an Eric Clapton concert (which has no resale value)

I know the man's not what he once was, but have some respect.
posted by aaronetc at 10:05 PM on March 4, 2012 [5 favorites]


Well if we're talking time machines, I'd just go see Fleetwood Mac because Peter Green in his prime owned Clapton.
posted by horsemuth at 10:07 PM on March 4, 2012 [5 favorites]


The answer seemed pretty obvious to me. Surprised that more economists didn't get it right.

That said, the idea of getting a free Clapton ticket... with no resale value? Clearly, that means you're on the guest list at will call, and need to bring your ID, at which point you'd likely get the ticket... which you could probably sell at the door for $40+, as long as you get there early enough.

So seeing Dylan might still be a possibility... or perhaps you could get Mass Effect 3 from some kind of online sale. Or you could see Madness on their US tour... but either way, you're making out like a bandit, and if you don't have the moxie to cheat the system and get your "friend" into Clapton, well... there's yer opportunity loss right there, mac.
posted by markkraft at 10:09 PM on March 4, 2012


I saw Bob Dylan once, about 5 years ago. I'm a huge fan, and the ticket was free, and I absolutely hated it.

I went to a Dylan concert a few years back and didn't see him because he hunched over a small electric piano which was sort of hidden behind the PA. He did however say:

mahwa howa hmway hoaboo andgroun dawhay ho
posted by mattoxic at 10:11 PM on March 4, 2012 [17 favorites]


Wow, the Monty Hall problem always made sense to me, but I can’t even start to wrap my head around what this is trying to say.

That's because the Monty Hall problem is straightforward math - pure stats - whereas this is, you know, economics.

No matter the circumstances, whether the prize is a new dishwasher or a discount car wash or I don't know what, the probabilities at work in the Monty Hall problem remain the same. Whereas what if you couldn't pay me to go sit in an arena full of self-satisfied classic-rockin' garage-heroic Eric Clapton fans in their pleated jeans, air-guitarin' to every overly precise solo? What's the opportunity cost of seeing Eric Clapton? What if you'd literally have to shell out an hourly wage north of your average corporate lawyer's to make me sit in that seat for two hours? What's a night's share of my sanity worth anyway, Dr. Econ?

Economists, of course, hate this kind of talk, because it reminds them that their elegant models are built on baseless assumptions about how real live people actually think and act in the world.

I've seen Dylan. Dylan at his most mumblingly obstinate is still not even in the same basket of goods as post-Cream Clapton pablum.
posted by gompa at 10:13 PM on March 4, 2012 [2 favorites]


Also got free tix to Dylan once... pot smoke and smelly hippies everywhere. It was miserable, and we left early.

Great musician. Too bad about his fans...
posted by markkraft at 10:15 PM on March 4, 2012 [1 favorite]


Neither.

Because it's not Borknagar or Turisas.
posted by spinifex23 at 10:26 PM on March 4, 2012 [1 favorite]


That's because the Monty Hall problem is straightforward math - pure stats - whereas this is, you know, economics.

Wait, what? The opportunity cost calculation in the paper is also pure math. The messiness of economics problems comes in at the point where you try to figure out what utilities to assign to various consequences of actions. But the utilities are given in the problem -- the $0 value of the Clapton ticket (to you) and the $50 value of the Dylan ticket (to you). These are dollarized utilities. Once the utilities are given, the problem is just a math problem.

Maybe the fact that it is just a math problem is clouded by irrelevant details in the story. But those could be cleared up:
You have $100. You are offered an opportunity to trade $40 for $50. Or you may keep what you have, which costs nothing but also pays back nothing. What is the opportunity cost in dollars of not trading?
This is just a stripped-down version of the problem in the paper. The aged musicians are red herrings.
posted by Jonathan Livengood at 10:31 PM on March 4, 2012 [8 favorites]


They have a rephrased version of the question which does away with the phrase "opportunity cost" for people who aren't familiar enough with the definition:
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 (because he's so cool!). Assume there are no other costs of seeing either performer. Based on this information, what is the minimum amount (in dollars) you would have to value seeing Eric Clapton for you to choose his concert?
posted by alexei at 10:33 PM on March 4, 2012 [4 favorites]


Whereas what if you couldn't pay me to go sit in an arena full of self-satisfied classic-rockin' garage-heroic Eric Clapton fans in their pleated jeans, air-guitarin' to every overly precise solo?

Then you probably wouldn't go see him.

What's the opportunity cost of seeing Eric Clapton?

Take whatever you consider the best way to spend that evening, apart from seeing Clapton. Place some valuation on that. That valuation is your opportunity cost.

In this case, the opportunity cost would be very high, since seeing Clapton seems to be an economic bad for you.

You might as well ask what the opportunity cost of staying home is!

Of course there's an opportunity cost of staying home. The opportunity cost of staying home for the evening is your valuation of the best thing to do that evening that isn't staying home.
posted by ROU_Xenophobe at 10:46 PM on March 4, 2012 [1 favorite]


Wait, what? The opportunity cost calculation in the paper is also pure math. The messiness of economics problems comes in at the point where you try to figure out what utilities to assign to various consequences of actions. But the utilities are given in the problem -- the $0 value of the Clapton ticket (to you) and the $50 value of the Dylan ticket (to you). These are dollarized utilities. Once the utilities are given, the problem is just a math problem.

What I meant was that how you personally feel about whatever the prize is in the Monty Hall problem has no bearing on the statistical outcomes of the problem itself. Whereas this problem's built on the assumption that the value of a Dylan ticket to you - arbitrary, subjective, emotional - fits seamlessly as an integer in the same equation as the objective, independently verifiable actual cost in dollars of a free ticket.

The economists in the crowd nod and say, yes, that's exactly what we mean by opportunity cost, why so puzzled? And the rest of us return to reading our Kahneman et al., comforted by the reassurance that a dollar lost by a rich man is not and never will be the same as a dollar gained by a poor one and so on and suchlike.
posted by gompa at 10:47 PM on March 4, 2012 [5 favorites]


Wow, the Monty Hall problem always made sense to me, but I can’t even start to wrap my head around what this is trying to say.

It's just trying to get at the concept of opportunity cost, which is just the otherwise-best thing to do instead of the thing in question. The cost of spending $50 on X is $50. The opportunity cost of spending $50 on X is the otherwise-best thing you could have bought with $50, which is not the same thing.

In Eisenhowerey terms, the opportunity cost of a bomber is two hospitals, and the opportunity cost of a hospital is fifteen schools.

Unless they surveyed people who were already drunk, I was surprised to find the economists not just doing badly -- if only 3/4 had got it right that would have been pretty shameful -- but that they did worse than chance, indicating they had no clue at all what opportunity cost is.
posted by ROU_Xenophobe at 10:50 PM on March 4, 2012 [2 favorites]


I had saved up $40 for the Dylan concert, then got the free Clapton ticket. I took my girlfriend to see Clapton, and, afterward, we bought a bottle of wine, and had enough left over for cab fare home.

What's the problem again?
posted by mule98J at 10:51 PM on March 4, 2012


This is stupid. The opportunity cost of seeing Clapton is the difference in enjoyment between seeing Clapton and Dylan. Good luck putting a price on that. Turns out the real story here is even PhD level economists don't know shit about economics.
posted by ferdinand.bardamu at 10:52 PM on March 4, 2012 [2 favorites]


Take whatever you consider the best way to spend that evening, apart from seeing Clapton. Place some valuation on that. That valuation is your opportunity cost.

In this case, the opportunity cost would be very high, since seeing Clapton seems to be an economic bad for you.


I hope we can agree, ROU, that in any case the opportunity cost would be based on an arbitrary valuation. And that such a valuation (and the numbers it yields) is therefore not the same kind of thing as a statistical probability. One's math, the other's social science. Like the difference between grammar and stories, yes?
posted by gompa at 10:52 PM on March 4, 2012 [1 favorite]


What is the oppprtunity cost of seeing Eric Clapton?

YNGVIE FUCKING MALSTEEN! \m/
posted by KingEdRa at 10:53 PM on March 4, 2012 [3 favorites]


It reminds me of when I got out of college and in order to understand the value of money, I would convert the cost of things to the cost of a new CD, which were around $10 a pop.

So if lunch cost me 7 bucks? I'd be like: Fuck that. I'll brown bag it, and I'm 2/3 of the way to another CD.

If a drink at a bar was 4 bucks, well I could deal with that. even two drinks at 8 bucks I'd be okay, but once I'm hitting 12, 16 or (holy crap!) 20 bucks, I'd be like: Fuck that. I'm done. I need to save up for another CD.

And I could only afford about two new CD's a week if I was careful with mah money.

Of course, these'n here days with everything being mp3 singles oriented for 99 cents-like. I would be like: Fuck that, I have no idea what the value of my money is anymore...

Life was so easy at one time.
posted by Skygazer at 10:53 PM on March 4, 2012 [6 favorites]


One's math, the other's social science.

Bingo.
posted by ferdinand.bardamu at 10:56 PM on March 4, 2012


What I meant was that how you personally feel about whatever the prize is in the Monty Hall problem has no bearing on the statistical outcomes of the problem itself. Whereas this problem's built on the assumption that the value of a Dylan ticket to you - arbitrary, subjective, emotional - fits seamlessly as an integer in the same equation as the objective, independently verifiable actual cost in dollars of a free ticket.

But look, the Monty Hall problem also depends on implausible assumptions about the real world: that the prize is assigned randomly to one of the doors, that your choice is random, that Monty knows where the prize is and always opens a losing door (independent of your choice), etc. In order to get to the math part, you have to ignore the implausibility of the assumptions. And you should ignore those things because they have nothing to do with the point of the problem! Those assumptions are built in as givens. Just like the utilities in dollar values in the opportunity cost problem. Someone who asks whether you did an analysis of episodes of Monty Hall to see whether the prize was really assigned randomly would be utterly missing the point of the puzzle.
posted by Jonathan Livengood at 11:03 PM on March 4, 2012 [1 favorite]


Yes $50 - $40 = $10 was obvious. I suppose storybored suppressing the fact that Eric Clapton has zero value makes the question harder, but you aren't told that you like Eric Clapton either. And you cannot really assume you like Eric Clapton without being told so explicitly. It's another story if you reverse Dylan and Clapton though because you cannot infer from liking Clapton that your taste is so poor that you don't like Dylan. ;)

I doubt that saying $50 suggests forgetting the final step so much as not understanding the definition of "willing to pay". You could arrive at $0 through similarly incorrect definitions. Imho, neither represents ignorance per se, well unless you're an economist. Real people often forgo profitable transactions over transaction costs (potentially emotional) or the opportunity value of money (time value of money). I'd imagine almost everybody would answer the problem correctly if you used stock transactions as opposed to concerts.
posted by jeffburdges at 11:07 PM on March 4, 2012


Maybe Lemmy could just kick both their asses. Problem solved.
posted by stargell at 11:14 PM on March 4, 2012 [2 favorites]


I agree that the problem could be better phrased. If you strip it down to bare bones, I think I'll go with the rapid offensive unit.

My phrasing:
"You have several activities to choose from. You have assigned a value of $50 to one activity and have determined that the total cost of that activity would be $40. What would the cost of opportunity be for NOT doing that activity?"
posted by YAMWAK at 11:33 PM on March 4, 2012 [6 favorites]


I hope we can agree, ROU, that in any case the opportunity cost would be based on an arbitrary valuation. And that such a valuation (and the numbers it yields) is therefore not the same kind of thing as a statistical probability.

Not in the pejorative sense I think you mean from your earlier comment, no, I wouldn't.
posted by ROU_Xenophobe at 11:53 PM on March 4, 2012


in any case the opportunity cost would be based on an arbitrary valuation.

The hypothetical problem has addressed the "Arbitrary" portion of the equation by assigning a specific number to it: $50.

The "obviousness" of the answer is probably easier to see if the numbers are made more extreme:

Option A is to go to a store which is selling cars for $1000, but which normally cost $50,000
Option B is to stay home and take a nap.

X= A-(B+C) where A is the normal price, B is the advertised price, and C is whatever a nap is worth to you.

In my case the solution is zzzzzzzzzzzzzzzzzzzzzzzz...
posted by ShutterBun at 12:02 AM on March 5, 2012 [1 favorite]


The problem gets a *lot* easier if you replace every instance of "you" with "some idiot".
posted by erniepan at 12:37 AM on March 5, 2012 [5 favorites]


As YAMWAK shows, when yous trip down the story to its bare essentials, opportunity cost is easy enough to understand: how much money would you lose not doing something, or doing x instead of y. It's a usable concept for when you want to decide as "rationally" as possible between a number of alternative actions, for an economist's definition of "rationally".

In day to day life this is usually not how we make these decisions (though just like Skygazer did with CDs, I do tend to compare small impulse buys with how many secondhand books I can buy for them), which is why when you put these sort of problems into an everyday problem, they tend not to work very well...
posted by MartinWisse at 12:41 AM on March 5, 2012


I stayed home and watched Eric Clapton and Bob Dylan performing together on the Internets. Snide one-upmanship: priceless.
posted by twoleftfeet at 12:59 AM on March 5, 2012 [1 favorite]


Yikes, I thought I knew what opportunity cost was - I've certainly used it correctly in the past - but I found that story so unnatural, contorted and tortured, I confess that it confused me.
posted by smoke at 1:20 AM on March 5, 2012 [1 favorite]


So what are some real-world examples that demonstrate the utility of opportunity cost?
posted by wemayfreeze at 1:55 AM on March 5, 2012 [2 favorites]


I got the answer instantly, but thought the example was weird because of the "willing to pay" bit. If you are willing to pay $10,000 to hear Dylan but are incapable of passing up a freebie we wouldn't say that your opportunity loss was $9960.00. Right?

Or am I not understanding something?

How's this example:

You plan to buy a new RilyKool refrigerator that sells for $800, and learn that [Some Store] is having a one-day-only 40%-off sale on RilyKool refrigerators Friday, so you plan to go buy one in silver for $480. On Friday just before you leave to go buy it, a trusted friend offers to give you their brand new, never used, factory-fresh RilyKool refrigerator in white for free, and of course you snap it up. Your opportunity loss (where the opportunity is to get this fridge right away in silver for 40% off the regular cost) is $320, because if on Saturday you decide that you just have to have the fridge in silver after all, so give the white one back and go buy the same fridge in silver for the regular price, you will pay $320 more than you would have if you had bought it on Friday.

(Also, your friend delivered it for free, and picked it back up for free, and now hates you.)
posted by taz at 2:37 AM on March 5, 2012 [3 favorites]


Of course the question is easier if you take the distracting specifics* away. The issue is that trained economists ought to be better than other people at taking away the distracting specifics, since that is supposed to be what they are learning to do. The fact that they are worse than other people at it suggests that economic education is not doing what it is supposed to do. This is like the stuff that anotherpanacea posted in another thread that shows that trained specialist analytic philosophers of ethics are actually worse than other people at producing consistent, unbiased responses to a couple of hypothetical situations discussed about every five minutes in analytic philosophy of ethics.

*Of course these 'distracting specifics' are built on a weird assumption economic theory makes about choice, namely that you can assign a dollar value to every desire or valuation. Of course this assumption is demonstrably untrue. The issue is that 'normal people' should be the ones getting tripped up by this, not economists who should be used to it.
posted by Acheman at 2:43 AM on March 5, 2012 [3 favorites]


gracedissolved: "As Yoram Bauman says, opportunity costs in microeconomics dictate that the worst thing you can be offered is a Snickers bar and an identical Snickers bar."
Also known as Buridan's ass.
posted by brokkr at 2:44 AM on March 5, 2012


This question is stupid, because it's unanswerable as given. There are bold assumptions and unanswered questions that are critical:

1) Do you ascribe any value to Clapton? If not, then as noted its a red herring, and has no value or meaning over staying home.

2) It isn't clear: is this the only night Dylan will be playing? If he'll be there tomorrow or soon, then the only cost is whatever (unspecified) value you'd place on waiting X days for your next chance to see Dylan, as well as:

3) if Dylan is playing again soon, what will the cost of the ticket be then?

These seem like critical elements left unanswered. If we assume this is your only chance to see Dylan anytime soon, then your opportunity cost is $10, no? Something you value at $50 was available for only $40, and not again, so you've lost $10 (although obviously economics misses that you might only pay up to $50 but still put a value on the experience as much higher). But if Dylan will be there tomorrow, and costs $40, then there's no lost cost. Else if the tickets are much pricier then it's still $10 since you'll presumably not go if it's much pricier and thus lose out on an experience you value at $50 and for which you would have paid $50 but can get now for $40.
posted by hincandenza at 2:50 AM on March 5, 2012


I got the answer instantly, but thought the example was weird because of the "willing to pay" bit. If you are willing to pay $10,000 to hear Dylan but are incapable of passing up a freebie we wouldn't say that your opportunity loss was $9960.00.

It is weird, but it's still economically true. The issue is that economic theory demands that willingness to pay = strength of desire. Now, this is trivially false because rich people are willing to pay more for things, but do not have stronger desires. This becomes apparent when we talk about being willing to pay $10,000 because someone who is willing to pay $10,000 for concert tickets is obviously filthy rich and we intuitively discount the desire-value of their dollars accordingly. An economist does not.

The thing with the fridge is that it doesn't matter that the fridge was originally on sale for $800. You have to imagine the highest price you would pay for a silver fridge at auction*. Then remember that for an economist this is a direct measure of the 'value' to you of a silver fridge. Say it is $1000. We are not then surprised that you were willing to buy the fridge at $800, because the value of the transaction to you is then $200 in your benefit. If you were going to be able to buy the silver fridge at $480, the value of the transaction would have been $520, because you were swapping $480 for a fridge that had a value to you of $1000. If you take the white fridge, you had better have been willing to pay at least $520 for it at auction, otherwise you are making a swap in which you lose out overall.

*Forget for a minute the fact that you would find buying a fridge at auction stressful and profoundly dodgy and this would lower the price you were willing to pay.
posted by Acheman at 2:55 AM on March 5, 2012 [3 favorites]


I got the answer instantly, but thought the example was weird because of the "willing to pay" bit. If you are willing to pay $10,000 to hear Dylan but are incapable of passing up a freebie we wouldn't say that your opportunity loss was $9960.00. Right?

Yes, in this case the opportunity cost would be $9960. Or, to put it another way, you'd have to value the free Clapton ticket at more than $9960 to choose the Clapton concert over the Dylan concert.

In your fridge example, the opportunity cost of keeping the free fridge is:
(how much more you'd be willing to pay for a silver fridge than a white one) minus ($480)
posted by A Thousand Baited Hooks at 2:57 AM on March 5, 2012


These seem like critical elements left unanswered.

They're not unanswered. All this information is contained within the fact that you would be prepared to pay $50 for Dylan tickets. If he plays more frequently, the assumption is that you would not be prepared to pay so much for each individual performance. On the other hand, if this is is only performance in a decade, that will jack your price up. If you do not expect to be able to afford the other concerts, similarly. You have to take the $50 value as given.
posted by Acheman at 2:58 AM on March 5, 2012


Though this is a simple question about a quantity with a perfectly unique definition, the whole tone of this strikes me as one of those many cases where economics make models that say that people should think some way and, when they don't, they blame the people for being wrong, not the model for being wrong. If even trained economists fail to get the correct answer, that strikes me as instructive that the definition of opportunity cost in this case does not actually map to a feature of human behavior relating to costs and choices.
posted by Schismatic at 2:59 AM on March 5, 2012 [5 favorites]


Err... "...where economists make models..."
posted by Schismatic at 3:00 AM on March 5, 2012


In your fridge example, the opportunity cost of keeping the free fridge is:
(how much more you'd be willing to pay for a silver fridge than a white one) minus ($480)


Almost, but not quite. if we say that S is how much you would be willing to pay for a silver fridge and W is how much you would be willing to pay for a white fridge and P is the price of a silver fridge at auction, the opportunity cost of keeping the white fridge is (S - P), ie W does not come into it. The benefit to you of keeping the white fridge is W. The overall value of the transaction is (W- (S-P)) ie the benefit minus the cost, which in this case is all opportunity cost since the fridge is free.
posted by Acheman at 3:01 AM on March 5, 2012


Almost, but not quite.

Ha, you're right, of course. I think what my calculation gives is the expected utility of buying the silver fridge, which is not an opportunity cost.

Despite the fact that I apparently don't know how opportunity cost works, I am not an economist.
posted by A Thousand Baited Hooks at 3:15 AM on March 5, 2012




The equivalence of 'Bob Dylan Concert' and $50 bothers me. As far as I see it, the opportunity cost is one Bob Dylan concert, and $40 of expenses. The Dylan concert is not in any meaningful way 'worth' fifty dollars - by picking the Dylan concert you don't end up $10 better off than you did with Clapton - you end up $40 WORSE off, and one concert experience richer. To say it has a dollar value is misleading at best - should an economic emergency arrive, you can't trade it back. The ticket might have value (in resale) but once the concert has happened, that falls to zero, all economic value being converted (assuming you went to the gig) to unquantifiable, non-economic emotional 'value'. Trying to put numbers on this just doesn't really work, unless you're happy with conclusions like 'spend $40 you cannot get back, receiving nothing of tradeable value in exchange, end up $10 richer'.

It's like someone saying they've earned a thousand dollars because they bought a thousand tins of sardines at a dollar off. Yes, you can conceive of it that way, but no it's not really useful to do so...
posted by Dysk at 4:02 AM on March 5, 2012 [7 favorites]


In my way of thinking:

"No re-sale value" != No value to me.

The problem states the Dylan show is "next-best alternative". This does not mean best. This means something else is better. It contains an apparently subjective judgement. This judgement doesn't seem to be included in any evaluations. This is especially significant considering the "no re-sale value" statement above.

While I figured the answer had to be 10 (I have the heart of an accountant, in a jar somewhere around here), I found it personally silly to call the one show a $50 "benefit". But I place high value on staying home, so there is that.
posted by Goofyy at 4:11 AM on March 5, 2012 [2 favorites]


About the possibility of a jumper traveling at mach speeds, as mentioned for the Redbull jump, I'm wondering how would the parachute break the fall rate in a such a way that it does not endanger the person?
posted by Meatafoecure at 4:32 AM on March 5, 2012 [1 favorite]


This_Will_Be_Good,

The entire science of economics is not based on a drunken argument outside of Wiener's Circle.





It's based on a drunken argument outside of Jimmy's Woodlawn Tap.
posted by TheWhiteSkull at 4:33 AM on March 5, 2012 [1 favorite]


oops... never mind wrong thread.
posted by Meatafoecure at 4:33 AM on March 5, 2012


Eponysterical.
posted by O Blitiri at 4:59 AM on March 5, 2012


Only economists can affix a negative to scoring free tickets to a Clapton concert.
posted by Thorzdad at 4:59 AM on March 5, 2012 [1 favorite]


Wait, I'm having a hard time figuring out the take-away message here. Is it:

a) Two economists wrote such a bad test question that even other economists couldn't really understand what they were on about.

or

b) some people show bad judgement, as exemplified by their desire to punish their ears by seeing Bob Dylan live.

I'm leaning c) All of the above.
posted by .kobayashi. at 4:59 AM on March 5, 2012 [1 favorite]


The problem here is that the satisfaction of seeing Dylan, expressed in monetary terms, is $50. So, you are able to get $50 worth of satisfaction for only $40; a net benefit of $10. When you choose to go see Clapton, you miss out on $10 net worth of satisfaction; hence the opportunity cost.

However, the problem does not make sense from a non-economist perspective. Go see a free show, or pay $40 to see a different show. To my mind, seeing Clapton saves you $40; so the opportunity cost is -$40.

However, the real point here is that many economists do not have a good understanding of a basic economic principle. Either because those economists are incompetent or, more likely, because this fundamental principle is just not terribly practical and thus hardly ever used.
posted by Vindaloo at 5:02 AM on March 5, 2012


The redeeming thing about Clapton is that he cheerfully acknowledges that he's not half as good as the black blues guitarists whose styles he has made millions from copying.

Opportunity cost for never having had a chance to see Freddy King: infinite.
posted by Trurl at 5:33 AM on March 5, 2012


Some of you seem to be saying that Eric Clapton is a red herring, because seeing him has no value. After closely examining unretouched photographs, I have concluded that Clapton is a white man, not a red herring.
posted by Kirth Gerson at 6:04 AM on March 5, 2012


principle is just not terribly practical and thus hardly ever used

This is the ruse. Look at the state of capital society. The principles are incredibly practical, just not for analytic purposes.
posted by Reasonably Everything Happens at 6:17 AM on March 5, 2012 [1 favorite]


I remember how back in the day you could go the the Clapton show, and then you went down to a local record store, one that still had mostly vinyl and you'd talk to the guy behind the counter, who knows a guy who can get you a great angle video of the Dylan show, with soundboard audio.
posted by Catblack at 6:18 AM on March 5, 2012 [1 favorite]


I took microeconomics two semesters ago. The class opened with the ideas that people are rational actors and that the greatest benefits as gained from decisions made on the margin. I came away from the class with an A- and a deep distrust of economics and economists. If your social science is based on people being rational actors, you're screwed because people are not and never have been rational actors. People do things against their economic best interests all the time.

I got the question right, only because I unsuccessfully argued with my professor about a similar question on a test that I got wrong. I don't agree with the basic premise of the question, that the dollar value of $50 encompasses my entire valuation of an experience.
posted by double block and bleed at 6:21 AM on March 5, 2012


"are gained"

we really need a 5-minute edit window.
posted by double block and bleed at 6:23 AM on March 5, 2012


There are a lot of unknowns in the problem, which makes it impossible to evaluate the utility of either choice. (Marginal Utility, Law of Diminishing Marginal Utility).

If I am wealthy, and this is Dylan's last concert ever, then going to see Dylan seems like a pretty good idea.

If I am poor, and the $40 Dylan ticket would have to be paid out of my grocery money, and he's coming to town again next year, suddenly going doesn't seem like such a great idea.
posted by selfmedicating at 6:27 AM on March 5, 2012 [1 favorite]


Given that the Clapton tickets are worthless to you, and the Bob Dylan tickets are worth $10 less than you pay for them... why is this an issue?

The correct answer, at least to the problem as listed above, is Opportunity Cost = X +Y -$50, where X is the amount you are willing to pay on any given day to see Eric Clapton, and Y is the cost of the Dylan ticket you have paid when you make the decision. The reason the $50 benefit is set as negative is because we are phrasing this in terms of costs.

The question there is different than the question posed in the spoiler link, where the answer is clearly $10 -- X is set to $0, and Y is $40, and thus, -0 +40 -50 = -$10 in opportunity for seeing Clapton over Dylan. Seeing Dylan realizes both benefits and costs, thus, the real gain would be $10.

The problem with the problem above is the only implied worthlessness of the Clapton tickets to you in the problem above. If you were willing to pay, on any given day, $100 to see Clapton, the opportunity gain to you to go to the Clapton concert is now $100 -40 -50 = $10. You are forgoing your $50 benefit of seeing Dylan, and gaining $100 from seeing Clapton. You've lost $40 in actual costs, thus, the opportunity cost is negative $10 for seeing Clapton, and is $90 for seeing Dylan (you lose $100 in benefit for foregoing Clapton, and $40 in costs, and gain $50 in benefit from seeing Dylan, $50-$100-$40=$-90)

If the tickets were in fact available day of sale, so that you do not have to pay for the Dylan tickets if you choose to see Clapton, then the opportunity gain of seeing Clapton is now $X-50 -- you don't purchase the Dylan tickets ($0 real cost,)) you lose the $50 benefit of seeing Dylan, and gain X for seeing Clapton for free. If, again, we're willing to pay $100 on any given day, in this scenario, the opportunity gain for seeing Clapton is $50 (lose $50, gain $100), and the realized costs of seeing Dylan are $90 (lose $100 benefits and $40 actual costs and gain $50 benefits.)

If you go to Dylan, or have to have purchased the ticket in advance, then your real cost for the show is $40. If you can walk up, the real cost of a Dylan ticket is $40 if you go, and $0 if you don't. The real cost of a Clapton ticket is $0 (Since you won it, you pay nothing regardless.) The real value of the Clapton ticket is set, by both problems, at $0 -- it can only gain you one Clapton Concert.

The reason for the difference between the two problems as written: "No resale value" does not mean "No value", it means that it's not equivalent of currency. The only thing that ticket is worth is one Eric Clapton concert, and cannot be exchanged for other goods and services. The reader has to price it for themselves, since they have not been given a price, like the Dylan concert in the problem.

Now, the problem on the spoiler page reads "No resale value (and no value to you.) ", which means that the ticket is not only not currency, you consider it worthless, because you have no interest in seeing Clapton, and thus, gain no benefit (and no benefit, no cost, and no opportunity cost lost when you give up the Clapton concert.)

In this case, X, the benefit price of the Clapton show to you, is 0. Going to the Clapton concert means you forgo the benefit of the Dylan concert ($50) and the cost of the tickets ($40 or $0) and gain nothing ($0), so the opportunity cost here is $90 or $50, depending on if you have to buy the Dylan ticket in advance or not. Going to the Dylan concert is an realized gain of $10 -- you get the $50 in benefits, and spend the $40 for the ticket, and net $10.

So, really, what this problem is -- poorly worded.
posted by eriko at 6:28 AM on March 5, 2012 [3 favorites]


The problem here is that the satisfaction of seeing Dylan, expressed in monetary terms, is $50. So, you are able to get $50 worth of satisfaction for only $40; a net benefit of $10. When you choose to go see Clapton, you miss out on $10 net worth of satisfaction; hence the opportunity cost.

I would easily pay $50 to hear Dylan play Satisfaction.
posted by Capt. Renault at 6:32 AM on March 5, 2012


1. Almost every problem has issues with wording, and almost every person who answers it *could* have been led astray by the wording. Certainly debating the terms of the problem at length is likely to yield more deviant interpretations, but they won't be representative of the average respondent.

2. The real issue is the original wording, not the wording here, unless someone here is taking a poll.

3. I wouldn't think that a lobby poll at ASSA (!) would be a great forum for testing deliberative replies. But perhaps the only thing worse would be administering it here. I mean, no offense, but the one thing people posting at MeFi DO NOT UNDERSTAND is opportunity cost.
posted by Clyde Mnestra at 6:37 AM on March 5, 2012


The benefit you would derive from going to the Clapton concert, if any, is irrelevant. The problem is asking you to calculate your gross cost of attending Clapton, not the net cost/benefit to you.

When you leave the supermarket, you don't say your groceries were free because you love baked beans way more than $1.59 you were charged. Or maybe you do. You seem like a really sweet, optimistic, but maybe not totally practical person.
posted by planet at 6:41 AM on March 5, 2012


Is this like when I needed new boots, so I went to a Christmas sale at the store that was to start at 9PM, and we didn't realize a line had already sort of formed, so by the time 9PM rolled around we were way the hell back in line, and so I spent the time waiting in line figuring out if that time (Using my hourly work wage as a guide for what my time is worth) was equal to or less than the money saved by buying the boots on sale? Because maybe I'm blinded by my complete indifference to Clapton and love of Dylan, but this is just not clicking in my head.

On preview, eriko's comment is a great help.
posted by Alvy Ampersand at 6:43 AM on March 5, 2012


I have always struggled with the math of economics, but the concepts were solid. So I got it right.

I can't show you my work though.
posted by Ruthless Bunny at 6:58 AM on March 5, 2012


The Dylan concert is not in any meaningful way 'worth' fifty dollars

Pretty much the most important notion of economics is that things are "worth" whatever someone is willing to pay for them.

From goods and services, to stocks, gold, even currency itself. An item's worth (not it's "cost") is ultimately determined by the buyer. Whatever additional factors influence the buyer (scarcity, need, desirability, financial situation, etc.) have already been included in this hypothetical scenario, resulting in a "worth" of $50 to the buyer.
posted by ShutterBun at 7:05 AM on March 5, 2012


Opportunity cost was one of the only things I truly got in my Econ classes.

And I truly sympathize with the modeling complaints. Reminds me of an old joke: Two economists are stranded on a barren island with nothing in their possession but a sealed can of beans. What do they do?

First, they assume a can opener...
posted by Benny Andajetz at 7:07 AM on March 5, 2012


If your social science is based on people being rational actors, you're screwed because people are not and never have been rational actors.

Rational in that context doesn't mean what you think it means. It doesn't mean that economists assume everyone is a Vulcan or that every person is without fail homo economicus. It means that people make decisions that they think will get them what they think they prefer. That's all.

The use of rat-choice models doesn't imply that people are in any real sense rational, or that the user believes that all people without fail are rational actors. At most, it embodies an assertion that within the class of decision-maker you're thinking about (consumers, producers, legislators, whatever), enough actors behave sufficiently like rational actors that the model is a useful simplifying device for understanding what's going on.

People do things against their economic best interests all the time.

Which can be entirely rational. If I take a lower-paying job than I could otherwise obtain because I like the work environment better and, overall, prefer my life in the lower paying job to what I think my life in the higher-paying job would be, congratulations! I am rational.

Where there is evidence that people might not be rational actors, it doesn't show up in big, raw, obvious things like people not pursuing a maximal income. It shows up in asymmetric attitudes towards risk and other pretty technical matters.
posted by ROU_Xenophobe at 7:13 AM on March 5, 2012 [1 favorite]


"The question is poorly expressed in a manner to clearly define the 'opportunity' and if it was more clearly expressed people would have no problem quantifying the opportunity."

Well, if we only expected economists to do math we would call them mathematicians. Problems in the Real World are rarely expressed clearly, and making mathematical sense out of murkily phrased issues is what economists are supposed to be trained to do. Not just... you know, subtract.

Embarrassing, and I make no excuses on their collective behalf.
posted by TomStampy at 7:17 AM on March 5, 2012


The thing about computations like this is that it treats the experience of seeing Bob Dylan as equal to $50, so that if you get to see Dylan, but are $40 poorer, that's the equivalent of getting $10.

The "equality" here comes from the fact that I would pay $50 for a ticket to see Bob Dylan, but not $51. I certainly wouldn't pay $60 to see Dylan.

On the other hand, if I had bought my $40 ticket to see Dylan, and somebody offered me $60 for it, I wouldn't do it.

So how much is seeing Dylan worth to me?

This kind of objection doesn't make the question a bad question, and the answer marked as right is clearly the best one. If I give a question on a calculus exam about the arc of a missile, I'm going to ignore air resistance. Fortunately, the people who fire missiles don't ignore this. Similarly, real-life economists are well aware that things that aren't money aren't actually the same thing as money, and that people don't always behave as if there were a linear utility function they were aiming to maximize. (Some economists think people should behave that way, but that's a different story, and not one about math....)
posted by escabeche at 7:19 AM on March 5, 2012 [2 favorites]


Also got free tix to Dylan once... pot smoke and smelly hippies everywhere. It was miserable, and we left early.

Great musician. Too bad about his fans...


I'd be curious to know when this happened. Because I don't think Dylan has had pot-smoking "smelly hippies" as a major part of his audience since the early 80s.
posted by hippybear at 7:36 AM on March 5, 2012


If Clapton is going to play the Derek and the Dominoes version of "Layla" my opportunity cost just skyrocketed. Lame ass "Tears in Heaven" / "You look wonderful tonight" sets...meh. I'll stay home and listen to the the Black Keys on Sirius.
posted by Kokopuff at 7:47 AM on March 5, 2012


I'd be curious to know when this happened. Because I don't think Dylan has had pot-smoking "smelly hippies" as a major part of his audience since the early 80s.

I didn't make that comment, but it was certainly true of the most recent time I saw him, a couple of years ago. It really was quite unbearable. The smell was awful enough, but the baked singalongs were even worse.

First time I saw Dylan? With Joni Mitchell as his opening act? Outstanding, incredible, life-changing. Second time I saw him, with Foo Fighters as his opening act? Really, really good, though why the Foo Fighter fans would actually leave before Dylan started -- no idea. Third time, with just Dylan himself, ruined by the fans, and get me the fuck out of here. (I paid more than $0, $10, $40 or $50 for each of the shows. I have never seen Clapton.)
posted by Capt. Renault at 7:49 AM on March 5, 2012


Guys, they don't mean that you'll literally be seeing Clapton, they mean that you'll metaphorically be, like, the Eric Clapton of economic story-problem solving.
posted by cortex at 8:06 AM on March 5, 2012


It may be worth stating explicitly that you can't assign any value to attending the Clapton concert because you are not told what you would be willing to pay to hear Eric live. That value might be 0 or even negative, as the snarkers suggest, but we don't know that. Dylan-satisfaction-units are 50.00, we're told that much. But the problem as stated leaves Clapton-satisfaction-units [UNSPECIFIED].

So, to abstract mercilessly away from all the long-wavelength herrings,
  You may program your robot to D%, which results in losing 40 units and gaining 50 units,
  OR to C%, which results in losing 0 units and gaining [UNSPECIFIED].

  Total outcome of selecting C% rather than D% = ([UNSPECIFIED] - 0) - (50 - 40)
...which is not solvable, but the question doesn't ask you to solve for total outcome, it only asked you to reduce the (50 - 40) term.

Stating the problem in terms of some desirable activity real people might engage in--concerts and so on--introduces all sorts of distractions from what the paper's authors expect economists to be able to focus on. But it also makes an implicit claim that the paper doesn't address, namely that the result will tell you something compelling about real life. Hey, you might even want to base policy on the answer!

The claim is false. Getting rid of absolutely all the "externalities" in terms of which the problem is stated but which have no effect on the solution makes the problem simple to solve, while also exposing how little connection it (and a great deal of the rest of economics) actually has to anything real and interesting.
posted by jfuller at 8:25 AM on March 5, 2012 [5 favorites]


Wait! So I go to a free concert that has no value to me but is somehow still ranks above a 10$ bargain on tickets I would have enjoyed? Doesn't that make me a non rational actor by definition? And If I can be a non-rational actor doesn't the entire field of economics just go poof and disappear like a fart in a dust storm? I wonder why economics students would do poorly at this?
posted by The Violet Cypher at 8:27 AM on March 5, 2012


> Yikes, I thought I knew what opportunity cost was - I've certainly used it correctly in the past - but I found that story so unnatural, contorted and tortured, I confess that it confused me.

Huh? I found it admirably clear, and I learned something about both economics terminology and economics education (the latter appears to be awful). Great post (and mostly depressing comments in this thread; thanks to those who were able to lay out the idea involved for those who were finding it hard to grasp).
posted by languagehat at 8:32 AM on March 5, 2012 [1 favorite]


The opportunity cost isn't really about seeing Clapton, it's about not seeing Dylan. This would be the same no matter what night he performs...you value the cost of seeing Dylan at $50 and you are offered tickets at $40, so you miss the opportunity to save $10. This remains constant regardless of the date of the event.

On most nights, there is no economic significance to seeing/not seeing Clapton, since the tickets have no economic value. An opportunity cost only arises when attendance at the Clapton concert precludes you from seeing Dylan.
posted by malocchio at 8:45 AM on March 5, 2012


I posed this question to a nun and she guessed $20. The same as in town.
posted by horsewithnoname at 8:50 AM on March 5, 2012


Bob Dylan is performing on the same night and is your next-best alternative activity.

That's the part that confused me. It makes it sound like seeing Clapton is worth more to you than seeing Dylan (which was so crazy, I couldn't think clearly about the rest of the question). I kept re-reading the question for some clue about what the problem thought was the cost of skipping the Clapton concert, when really it's just a stupid red herring, making this question the equivalent of, "A plane crashes on the border of the USA and Mexico. Where do they bury the survivors?"
posted by straight at 8:54 AM on March 5, 2012 [1 favorite]


Two summers ago, my wife and I found ourselves in Milwaukee for a wedding. We were there for a long weekend, and it appeareed that we were in luck: Summer Fest, an enormous, multi-week music festival featuring a lot of A-list talent, was happening a short walk from the hotel! The headliners only played the evening shows, of course, and it worked out that we were busy with wedding things for two of the three nights that we were there, but Sunday was our day to see the music. I was feeling pretty good about it, because Petty had headlined the Saturday show, and I knew from talking to a couple of guys in the hotel lobby that Clapton was playing Monday night, so we didn't even bother to check the schedule for the day we had free; Sunday would probably be someone comparably fun to see in a huge outdoor arena. We got our drink on in the early afternoon, and headed over for the later part of the day.

What we had not expected was a park teeming with adolescent girls, faces painted and carrying signs. For you see, we had picked the Wrong Day To Attend Summer Fest. Sandwiched between Petty and Clapton, we had chosen the evening of the marquee performance of none other than Canadian heartthrob Justin Bieber.

So, two observations:
1) There is no level of intoxication after which 11-year-old pop music fans are tolerable
2) You think you can talk to me about the opportunity cost of seeing Clapton? YOU WANT TO TALK TO ME ABOUT IT, MOTHERFUCKER?
posted by Mayor West at 9:04 AM on March 5, 2012 [2 favorites]


Yes, but who would win in a fight: Clapton or God?
posted by Jughead at 9:22 AM on March 5, 2012


Ditka.
posted by shakespeherian at 9:25 AM on March 5, 2012 [1 favorite]


JumpW: "The spoiler page actually contains an important detail in the problem description: the Clapton ticket has no value to you, in addition to no resale value."

Actually, it doesn't. Opportunity cost is the cost of forgoing other opportunities. It gets factored into the decision "should I go to the eric clapton concert," leaving you with the question "would I pay 10 dollars to see eric clapton?"
posted by pwnguin at 9:34 AM on March 5, 2012


Two similar options is not freedom of choice. Do something else.

That was my initial gut reaction: who wants to see Eric Clapton or Bob Dylan?

Are any of those answers really right? The opportunity cost is the cost of foregoing "seeing Bob Dylan and having $40 less money." But that's not the same thing as $10.

... and there's the second gut reaction. Who really cares about the definition of pointless economic terms unless you're trying to pass a (required) class?

There are so many rules and assumptions prior to making any argument, that the problem no longer exists in the real world.

Exactly.
posted by mrgrimm at 9:42 AM on March 5, 2012


PEOPLE! did Dead Poet's Society teach us nothing about such crass, mathematical, soulless techniques to evaluate art?
posted by Pirate-Bartender-Zombie-Monkey at 10:06 AM on March 5, 2012


Who really cares about the definition of pointless economic terms unless you're trying to pass a (required) class?

Which is pointed out in the paper:
as a colleague pointed out, “[n]othing is important about a definition. It is only useful insofar as it helps us to think about a problem and to make the right decisions.” In these regards, we rephrased the question and conducted a second survey. The revised question reads as follows:

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 minimum amount (in dollars) you would have to value seeing Eric Clapton for you to choose his concert
(Emphasis mine) Which serendipitously resembles what I was saying a second ago.
posted by pwnguin at 10:22 AM on March 5, 2012


I KNOW WHAT IS GOING ON

The question isn't about economics at all - it's a psych project to see how many people on the internet can make rational arguments out of a nonsensical proposition.
posted by Xoebe at 10:26 AM on March 5, 2012


HEY

I FIGURED OUT THE QUESTION THEY REALLY MEANT TO ASK

If we put Clapton and Dylan on a treadmill that exactly matches the tempo of their music, could we get them to take off?
posted by subbes at 10:49 AM on March 5, 2012


I don't know about them, but Jefferson Airplane definitely takes off.
posted by Kirth Gerson at 11:27 AM on March 5, 2012


ROU_Xenophobe:"...Where there is evidence that people might not be rational actors, it doesn't show up in big, raw, obvious things like people not pursuing a maximal income. It shows up in asymmetric attitudes towards risk and other pretty technical matters."

I didn't mean that people should act like Vulcans. I was trying to point out that people often fail to use all of the information at their disposal to make decisions that benefit them the most. I see this most, as you say, in terms of evaluating risk. Very few people think that shooting meth is a fantastic idea, but there are people who do it anyway.

So, my takeaway at the end of this is something that I suspected while taking the class. Economics must get much more interesting after the mind-numbing entry level course. That would explain why the PhDs have forgotten all about their first microeconomics class as well as why anyone would continue to pursue the subject after taking that class.

Part of my dislike for the class was the idea that such gross oversimplifications could be applied in all seriousness to real world problems. This gives me hope that the models used by real economists who are in positions to do real damage to the economy are based on more subtle and realistic models. Right? Right?
posted by double block and bleed at 12:59 PM on March 5, 2012


This is a great way to justify quitting ones job if one thinks of the pricelessness of time in a life being happy or time in a life being miserable for x amount of dollars, the opportunity cost of quitting ones job, if it's not making one happy is:

Infinity (time +life) - x (one's salary) / Infinity (Time+Life) = Death / Crap job

Feel free to use the following resignation letter I have compos-ed:
To whom it may concern (i.e., Bossman)

Having recently discovered the idea of "opportunity cost" I have derived my value at this company as being expressed by the following formula:

Infinity (time +life) - x (one's salary) / Infinity (Time+Life) = Death / Crap job

Therefore, I quit. Effective immediately.

Thank you and good luck in your future craptastic-ness to suck away the nectar of life from all that makes life worth living.







posted by Skygazer at 1:04 PM on March 5, 2012


I think that "cost/benefit" argument is loony toons. You wanted to go see something. You could either go for free to Eric Clapton or the next best activity which is Bob Dylan.

How do you assign an opportunity cost to something that you were never going to do do anyway?
posted by Slackermagee at 1:05 PM on March 5, 2012


And you know what, this paper just proves it...I have read and re-read the definition of opportunity costs, and willingness to pay, and surpluses....I still don't understand exactly why it is that nobody should pay for public transit...or airline tickets....I don't even understand how much I am willing to pay for a cheeseburger...or if I am rational..or how much my transactions cost..

Well, maybe the common factor here is you.

I think that "cost/benefit" argument is loony toons. You wanted to go see something. You could either go for free to Eric Clapton or the next best activity which is Bob Dylan. How do you assign an opportunity cost to something that you were never going to do do anyway?

'Best/next best' does not mean you prefer Clapton and would therefore have skipped Dylan. It simply refers to the fact that you got the Clapton tickets for nothing but would have to pay out money if you decide to go see Dylan instead (albeit at a 20% discount to what you think a Bob Dylan concert is worth). The question is not about whether you like Clapton or not, and the lesson that is being taught here is that the answer is not dependent on whether or not you like Clapton. If you like Clapton a lot - enough to pay $75 for a Clapton ticket, say - then the opportunity cost of attending the Dylan concert when you had a free ticket for Clapton is very high. If you hate Clapton, then it is zero.

In either case the economic cost of going to see Dylan is $40. Regardless of your Dylan/Capton preferences, going to see Dylan is more expensive than going to see Clapton. That's why it's your 'next best activity': the higher economic cost means that you may not be able to afford the Dylan concert even if it's what you would prefer.

Economics is a system for measuring the value of your available choices, not for imposing choices upon you. the objections to this problem that are being voice din this thread are spectacularly stupid.
posted by anigbrowl at 1:54 PM on March 5, 2012 [3 favorites]


Seen Dylan twice. Once was great, once was not so great. A free ticket to Clapton would not entice me to see him. Let's rephrase this in a way that would make me interested: You've won a free ticket to see The Misfits, not a great band but they do have Dez Cadena. On that same night you could take a time machine and go to London and see the greatest punk bands of all time in their prime! However it will cost you $40, a night you would literally give body parts for. What is your opportunity cost?
A) Really you cheap ass, The Misfits?
B) Man, back in the day I paid 5 bucks to see 10 bands and free beer.
C) If I punch out Malcolm, will the world turn more fascist when I come back?
D) Do I get to be just as young as I was then, or do I have stay old and fat? And can I stay?
posted by evilDoug at 2:59 PM on March 5, 2012


Oh and:
E) I think I'm on the guest list.
posted by evilDoug at 3:01 PM on March 5, 2012


> How do you assign an opportunity cost to something that you were never going to do do anyway?

Arbitrarily, for the purpose of the exercise. It's calculated from a couple of PIOOMA numbers provided in the problem just to give you something to work with. (Expansion of PIOOMA is left to the student.)
posted by jfuller at 3:58 PM on March 5, 2012


I have free tickets to Gomez next week and I'm pretty psyched.
posted by grateful at 5:46 PM on March 5, 2012


Before I read this thread, I think I understood the concept of 'opportunity cost'.

Now all I can think of doing is skinning and tanning Bob Dylan and then filling the sewn-together skin up with pureed Eric Clapton like a gigantic meat water balloon.
posted by stavrosthewonderchicken at 10:39 PM on March 5, 2012


No, no, that's comparative advantage. Totally different concept.
posted by cortex at 10:43 PM on March 5, 2012 [1 favorite]


It's really easy.Opportunity cost is how much money you (potentially) might have lost if you had done the thing you didn't do. The lower the opportunity cost, the more you want to take advantage of it. I think the problem people are having and I'm having is imagining that there are such equal things in the world. Clapton does not equal Dylan. It's apples and oranges far as I'm concerned, and this concept really explains why so many economists have their heads so far up their own asses.

But, since the gauntlet's been thrown down, I think it would be fairly easy to build a graph that could show opportunity cost as an unspent kinetic energy between two separate actions.

Just plot the cost of the two actions and then turn the graph on the x and y axis and plot it again upside down. Done and done.
posted by Skygazer at 12:31 AM on March 6, 2012


...that's comparative advantage. Totally different concept.

And a largely redundant one. Is there any such thing as an uncompetitive advantage?
posted by Kirth Gerson at 4:52 AM on March 6, 2012


Well, I need more coffee, don't I?
posted by Kirth Gerson at 4:53 AM on March 6, 2012


Let me check my Dismal Science Coffee Level Meter.

*checks*

It says that the nature of emergent systems of human coffee distribution will trend naturally toward iniquity, with coffee being concentrated largely in the hands of a few while the masses go wanting.
posted by cortex at 7:28 AM on March 6, 2012


I knew it! A sinister plot by the 1% to deny me my caffeine birthright!
posted by Kirth Gerson at 8:02 AM on March 6, 2012


...that's comparative advantage. Totally different concept.

And a largely redundant one. Is there any such thing as an uncompetitive advantage?


Comparative, not competitive. And no, it's not redundant. Comparative advantage is as opposed to absolute advantage.
posted by ROU_Xenophobe at 8:20 AM on March 6, 2012


Opportunity cost is how much money you (potentially) might have lost if you had done the thing you didn't do [...] this concept really explains why so many economists have their heads so far up their own asses.

That is not what it means at all. I will attempt one more explanation, that shows what it is and how it can be used.

You need a new pair of shoes, and the kind you like usually costs $50. you get a flyer in the mail telling you that for today only they are on sale at a nearby shoe store for only $30. However, you had planned to go fishing today, which requires all the remaining time in the day, and you really, really love fishing. Maybe enough to skip the shoe sale.

If you do skip it, the opportunity cost of doing so is $20: the difference between the amount of money you would normally spend on shoes (defined as a necessity) and the discounted price that was temporarily on offer. From your action, we could infer that going fishing has an economic value of either >$20 or <$20, based on whether or not you chose it instead of a known $20 discount.
posted by anigbrowl at 11:30 AM on March 6, 2012 [1 favorite]


Does this mean the answer isn't Ghostbusters 2?

I have never, nor will I ever understand the Monty Hall problem.
posted by ostranenie at 7:35 PM on March 6, 2012


That is not what it means at all. I will attempt one more explanation, that shows what it is and how it can be used.

That makes so much more sense to me than the original, and although it still seems odd, at least I understand the point. It makes sense to me if you are definitely buying the shoes at a later date. And this is obviously one good reason that I am not an economist.
posted by bongo_x at 9:00 PM on March 6, 2012


I don't understand "opportunity cost" well, but I think it might explain the fact that anytime I'm given a choice between reading an economist and doing anything else, I always choose "anything else".
posted by benito.strauss at 3:50 PM on March 7, 2012 [1 favorite]


Anigbrowl: From your action, we could infer that going fishing has an economic value of either >$20 or < $20, based on whether or not you chose it instead of a known $20 discount.

Thanks Anigbrowl. Now that is understandable. I think most of the problem with understanding Opportunity Cost through that whole Clapton vs. Dylan meshigas is the real problem here and the inspiration for the "spectacular stupidity" you said it inspired in this thread, but really, I think that little mindbender is designed mostly as an in-joke ha ha, for economists and ho ho ho, it is hilarious...whoah I am holding my sides from the mirth.

But seriously, yeah, your explaination is much better.
posted by Skygazer at 5:45 PM on March 7, 2012


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