Monday, September 05, 2005

Holiday Quiz

A puzzle is circulating round the Blogshpere involving doezens of academics and students on opportunity cost. The resultant exchanges of views is most interesting. What follows is from the Marginal Revolution Blog:

"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. "

Lost Legacy Comment:

Now go to Marginal Revolution : to read the very long number of contributions on this topic (also Trade and Barter, etc.,) and have an enjoyable time (holiday if in the US as its Labour Day) reading.

If teaching economics in the new term, post it for your students when they have covered opportunity cost, and, meanwhile, circulate your academic colleagues with the question and poll the results.

I am not so surpised or embarrassed as many seem to be: a questionnaire on Adam Smith's views, actual as oppsoed to popular, would score as badly, or worse.


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