Sunday, May 10, 2009

My Students On Opportunity Costs

In the first exam for my international economic policy class, I asked my students the following infamous 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?
Only a quarter of them answered it correctly (note this is slightly better than the quarter from the survey because my multiple choice had a "none of the above" option). But there were complaints that the question was confusing, particularly on the topic of if you already bought the ticket or not. So for the final, I repeated the question with a few tweaks:
You won a free ticket to Germany (which has no resale value). A plane for France is leaving at the same time and is your next-best alternative activity. You value the ticket to France at $600 and could buy it for $550. Assume there are no other costs of visiting either country. What is the opportunity cost of going to Germany?
I'm pleased to say that the class did much better but given that I repeated the same question, reworded it to make it clearer, and discussed the question in the wake of the first exam, that's expected. That 52% still got it wrong is not. I doubt it's me (though it could be) and recalling that so many economists got the original question incorrect, maybe there's something about opportunity costs that's more counter-intuitive than we give credit.

3 comments:

Anonymous said...

David, please give the answer and the reasoning for those of us not in your class. Thanks.

David said...

For the first question, the answer was $10; the second it was $50. The logic is that if you go to one, you cannot do the other. The net benefit of that next-best option (Dylan or France) is the opportunity cost. It is what you give up (since you give up the benefit AND the cost, we only care about the net benefit).

Anonymous said...

I think I need a definition of opportunity cost.