Opportunity Cost question - the answer
Well it seems that a sample of highly intelligent people had a similar success rate to professional economists and were rather less successful than guessing randomly. Guessing randomly would on average have resulted in a success rate of 25%. Actually, only 18% of you (three people) got the right answer.
However, one of those three people was not only the first person to get the correct answer, but also gave a perfect explanation of her workings.
So, a very special Phabulous Philmo Phlegm Gold Star to...
adaese
Yes, the correct answer is £10.
But why?
A few people went for an opportunity cost of £0. Now it's certainly true that since you haven't paid for the Clapton concert, it is costing you nothing in monetary terms. The argument that you haven't yet bought the Dylan ticket and so there is no cost involved in having wasted your money isn't actually correct. Why not? Because if you _had_ bought the ticket and you couldn't refund it, that cost becomes irrelevant because there is nothing you can do about it. The correct term for this in economics is a 'sunk cost'.
Other people went for £50, and they're closer, but not quite right.
We've established that the opportunity cost of something is what you have to give up to get it. In this case, you have to give up the Dylan concert to see Clapton. How much is the Dylan concert worth to you? The clue is in the question. You would normally be prepared to spend "up to £50" to see Bob Dylan in concert. So if I offered you a choice of £10 or seeing Bob, you'd go for Dylan every time. If the choice was £40 or Dylan, you'd still go to the concert. If the choice was £60 or Dylan, you'd go for the £60. The tipping point at which you are indifferent between the cash and Bob Dylan is £50.
So why is the answer not £50 then?
Well don't forget that the Dylan tickets cost £40. By choosing to go to see Eric Clapton, you lose out on a Bob Dylan concert that you value at £50. But, since the Clapton ticket is free and the Dylan ticket is £40, you also save yourself £40. That's a £50 negative and a £40 positive effect from going to the Clapton concert - in other words an opportunity cost of £10.
Finally, I'll adress a point that ladyofastolat made. She argued that surely it must depend upon the value you place on seeing Eric Clapton in concert as well as the value of seeing Bob Dylan. You're definitely thinking along economic lines, but you're not actually correct. What the question is asking is the opportunity cost of seeing Eric Clapton - the question is not whether you should see Clapton or Dylan.
Let's use a simpler example to illustrate this point. You are hungry enough to eat precisely one small meal. A kindly passer-by offers you a choice of two small meals for free* - white truffles and caviar (which normally you would be happy to pay up to £100 for) and a packet of salt & vinegar flavour crisps (which you'd normally be prepared to pay up to 60p for). You get only one of these meals. The opportunity cost of having the crisps is £100 - the value you put on the truffles and caviar you have forgone. Conversely the opportunity cost of the truffles and caviar is 60p - the value to you of the crisps forgone. You'll clearly choose the truffles and caviar, but notice how the opportunity cost of them would still be 60p if you valued them at £1million.
Opportunity cost is one of the most important concepts in all of economics. If you understand it, you can start to see the world in a slightly different way.
* Of course, as students of economics and classic science fiction well know, "There Ain't No Such Thing As A Free Lunch". Well, in this simplified thought experiment, there is.
More on "TANSTAAFL" in a later post.
However, one of those three people was not only the first person to get the correct answer, but also gave a perfect explanation of her workings.
So, a very special Phabulous Philmo Phlegm Gold Star to...
adaese
Yes, the correct answer is £10.
But why?
A few people went for an opportunity cost of £0. Now it's certainly true that since you haven't paid for the Clapton concert, it is costing you nothing in monetary terms. The argument that you haven't yet bought the Dylan ticket and so there is no cost involved in having wasted your money isn't actually correct. Why not? Because if you _had_ bought the ticket and you couldn't refund it, that cost becomes irrelevant because there is nothing you can do about it. The correct term for this in economics is a 'sunk cost'.
Other people went for £50, and they're closer, but not quite right.
We've established that the opportunity cost of something is what you have to give up to get it. In this case, you have to give up the Dylan concert to see Clapton. How much is the Dylan concert worth to you? The clue is in the question. You would normally be prepared to spend "up to £50" to see Bob Dylan in concert. So if I offered you a choice of £10 or seeing Bob, you'd go for Dylan every time. If the choice was £40 or Dylan, you'd still go to the concert. If the choice was £60 or Dylan, you'd go for the £60. The tipping point at which you are indifferent between the cash and Bob Dylan is £50.
So why is the answer not £50 then?
Well don't forget that the Dylan tickets cost £40. By choosing to go to see Eric Clapton, you lose out on a Bob Dylan concert that you value at £50. But, since the Clapton ticket is free and the Dylan ticket is £40, you also save yourself £40. That's a £50 negative and a £40 positive effect from going to the Clapton concert - in other words an opportunity cost of £10.
Finally, I'll adress a point that ladyofastolat made. She argued that surely it must depend upon the value you place on seeing Eric Clapton in concert as well as the value of seeing Bob Dylan. You're definitely thinking along economic lines, but you're not actually correct. What the question is asking is the opportunity cost of seeing Eric Clapton - the question is not whether you should see Clapton or Dylan.
Let's use a simpler example to illustrate this point. You are hungry enough to eat precisely one small meal. A kindly passer-by offers you a choice of two small meals for free* - white truffles and caviar (which normally you would be happy to pay up to £100 for) and a packet of salt & vinegar flavour crisps (which you'd normally be prepared to pay up to 60p for). You get only one of these meals. The opportunity cost of having the crisps is £100 - the value you put on the truffles and caviar you have forgone. Conversely the opportunity cost of the truffles and caviar is 60p - the value to you of the crisps forgone. You'll clearly choose the truffles and caviar, but notice how the opportunity cost of them would still be 60p if you valued them at £1million.
Opportunity cost is one of the most important concepts in all of economics. If you understand it, you can start to see the world in a slightly different way.
* Of course, as students of economics and classic science fiction well know, "There Ain't No Such Thing As A Free Lunch". Well, in this simplified thought experiment, there is.
More on "TANSTAAFL" in a later post.