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.