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Economics PhD’s don’t understand the opportunity cost idea

Paul Ferraro and Laura Taylor posed the following question to 200 PhD graduates in economics, 45% of which were from top-30 US economics departments:

Please circle the best answer to the following 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. 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
(d) $50.

You might want to think about the answer to this before you read on. 25% of students in the sample selected option (a), 22% (b), 26% (c) and 28% (d).

The correct answer is (b) which was understood to be correct by the smallest percentage of applicants. The reason? Going to the Clapton concert means you forego $50 in benefits from the Dylan concert but save $40 that you would have had to spend to go.

This poor response is disconcerting since ‘opportunity cost’ is one of the most basic ideas in economics and taught in the early stages of a first-year introductory unit. That nearly 80% of PhDs cannot answer the question correctly suggests something is wrong about the way economics is taught. The suggestion: Despite an array of technical skills most economics graduates don’t understand basic economics.

Do you get it right? The question is taken from R. Frank & B. Bernanke’s excellent Introduction to Microeconomics. They do teach basic ideas well.

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