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?
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
. 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).