William J. Polley

Very nice. For my program in agricultural economics at Cornell, we were required to take the graduate micro- and macro-economic theory sequence in the regular economics department (perhaps an inferiority complex among agricultural economists), plus we all took Robert Frank's course. The main course sequence was poorly taught -- and I say this even as somebody who enjoys math puzzles and economic theory -- while Frank's course was charming. He took great delight in catching the idiot savants in his care on their basic misunderstanding of the whole point of economics as a body of thought about the real world.

I teach Principles of Micro (I use Robert Frank's text with Ben Bernanke!) and I have tried, in recent years, to develop an underlying theme early on in the course that boils down to a few principles: people respond to incentives; markets work well; the concept of using marginal analysis; how competitive pressures coupled with self-interest work. And, like Parke notes, I try to show them on the very first day that economics isn't just for business anymore.

I majored in econ. I'm glad I answered the question correctly! I'm not sure how people got that wrong. It seemed like the most intuitive answer to me. Where did people go wrong on that one?

D__n, I got it wrong too. I forgot to subtract the cost of the ticket. But I answered in 0.5 seconds, because I thought the answer was "obvious". When the opportunity cost of giving a wrong answer is nearly zero (the economists who got it wrong are anonymous after all), at least lower than the cost of carefully spotting the tricky part of the question, then guess what Mr. Rational Economist will do? (By posting this non-anonymously I am credibly kicking myself. I guess there's a rational reason for that too.)

In short, I don't think the survey result provides good evidence of faulty understanding among professional economists. On the other hand there is abundant evidence of faulty understanding among laypersons. However, I don't believe any revision of a mere one-semester course is sufficient to impart basic economic logic. Learning economic logic requires time, and some personal stake in acquiring understanding, more perhaps than sheer pedagogical excellence.

Good comment, Roehl. Whether this simple survey is good evidence of faulty understanding among economists is a legitimate question. But the results were worse than random guessing! And the second version of the question should have been really easy.

In my opinion, I don't think learning economic logic requires any large amount of time, per se. You can do a lot in a semester. I think the most important thing is a willingness to see the world through the lens of opportunity cost. If you're willing to look at the world that way, you can learn economics.

I've given up on much of the material that I'm supposed to be covering in micro. I teach about 100 principles students a year and no more than 5 will major in economics. Why should I do a dis-service to society by trying to train 5% of my class to do well in intermediate micro? I've begun focusing on economic literacy for the 95% who will only take one additional econ course.

I don't cover cost curves anymore (gasp). I discuss all of the relevant topics (MC, AFC, economies of scale) but don't bother with the graphs. My students are happier and I am happier. I hope they are learning and retaining more of the basics.

John,

One of our former professors used to apologize to his students before he taught cost curves.

NO,NO, NO

The $10 is the consumer surplus you get from going to the Dylan concert -- the $50 in value to you less the $40 you pay.

It is not the opportunity costs.

Opportunity cost is an approach to evaluating alternative uses of resources.

The opportunity costs here is the alternative uses for the $40. The $10 consumer surplus
is a reason to go to the Dylan concert because
it implies that the returns would be higher
to you from this use then from another use.

Since the Clapton concert is free it is not an alternative use of the $40 and should not be considered in the question. Now, if the question had been about the alternative uses of your time, it would be a consideration. But as the example now stands it is just a red herring to confuse the people answering the question.

The opportunity cost are the alternative uses of the $40 spend on the ticket. But the good professor does not provide any of those alternatives.

Consequently, all of the proposed answers are wrong. The odds are that if you give people the opportunity of picking between 4 incorrect answers the answers they pick will be random or equally distriuted.

To me this looks like a very poorly written demonstration of the concept of opportunity cost.

No, no, no.

The $10 is not the opportunity cost.

The $10 is the consumer surplus you get from attending the Dylan concert --$50 in value less the $40 in cost.

Opportunity cost is an approach to evaluating
alternative uses of resources. In this example the opportunity cost would be the alternative uses of the $40. Since the Clapton concert is free it is not one of the alternative uses of the $40..

If you had asked the question in terms of the alternative use of your time, the Clapton concert would have been one of the alternatives.
But as the question is asked the information on the Clapton concert appears to just be a red herring to confuse us.

No alternative uses of the $40 are provided so the material does not provide an example of the opportunity cost.

thus, all four answers are wrong.

The odds are that if you ask people to choose between four wrong answers you will get a random or equall distribution. that appears to be what happened.

But this is just a badly written example of opportunity costs

Spencer,

The question was asked (somewhat obliquely--I would have worded it more clearly, more like the 2nd version) in terms of alternative uses of time. It is most assuredly not about the alternative uses of the $40. The question does say that the Dylan concert is the next best alternate activity. So the question is one of what to do on a given night: Clapton or Dylan. That's all, nothing else.

A second point is that consumer surplus is clearly being used here to put a dollar value on different activities. That's something we do all the time in everyday decisionmaking. Economists probably do it more consciously than others!

And the fact that the Clapton concert is "free" is part of the point. Even "free" things have an opportunity cost. TANSTAAFL!

What do you give up in order to see the Clapton concert? Nothing explicitly because the ticket was "free." But you give up what you would have received from the Dylan concert, namely the consumer surplus.

Sometimes the textbook examples make it easy by just posing the question as a choice between two things without explicit costs. My favorite is that the opportunity cost of coming to my 8:00 class is the extra sleep you would have had. No explicit cost either way. You've already paid for the class, and there's no money out of your pocket if you sleep. It's just where you want to spend your time. Easy.

Or, another oldie but a goodie is you're choosing between two concerts each with the same ticket price. The price of the tickets net out in the opportunity cost calculation. The opportunity cost of seeing one is that you don't get to see the other. Easy.

But if there are explicit costs, they must also be considered. Here, the cost of the Dylan ticket must be figured in, particularly because there is no explicit cost of the Clapton ticket. Far from being a red herring, the fact that there is no explicit cost of the Clapton ticket is the point.

I do prefer the second wording as it makes that point abundantly clear. But a majority still got it wrong. With that wording, there is no excuse for misunderstanding. Alex Tabarrok calls it a "professional embarassment." http://www.marginalrevolution.com/marginalrevolution/2005/09/opportunity_cos.html

So when you say, "The $10 consumer surplus is a reason to go to the Dylan concert because it implies that the returns would be higher to you from this use then from another use." That's correct only if the value you put on the Clapton concert is less than $10. If you value the Clapton concert at more than $10, you should go there. That is opportunity cost in action.

I agree with the answer you give me.

But you can not reach that conclusion from the information provided.

I still think this is a classic example of a teacher giving a poor explanation and then blaming the students for not getting it.

If the question involved the alnertative use of time the potential answers should have used time,
not money. this is part of the problem with the example, if the answer is what is the opportunity costs of the money you get one answer. If the answer is in term of the alternative use of your time you get a different answer.

No. There is no problem with posing a question in terms of the alternative uses of time and quantifying the outcome of those alternative uses in some other unit, like money.

That's what we're all about! And here's a quick example that makes it clear that putting the outcome in some other unit adds to the understanding of what is going on. Suppose you have one hour to spend either putting together a model airplane which you could sell for $5 or building a birdhouse which you could sell for $7. You choose to build the birdhouse. What would be the opportunity cost of building the model airplane? By your restriction that the answer should involve time, you could say it is the hour that you could have spent building the birdhouse. True, but uninformative. What is illuminated by posing the problem and the answer this way? You could say it is the birdhouse itself that could have been built. This is only slightly more informative, but does not take into account the value of the airplane that does get built when you choose not to build the birdhouse. Or, you could say it is the additional $2 that you would have received if you had built the birdhouse instead of the airplane. This is really the most informative answer because it translates the alternative uses of the hour into the difference in the value of what could be produced by those alternative uses of time.

And that last sentence is the heart of much of what economics is about.

Anyway, I'll give you this much: most textbooks do not get into this detailed of an explanation. Unless a professor has had students ask questions along these lines, they themselves probably haven't given these deeper explanations much thought.

If you are interested in an example of the sort of question I try to lead my students to think about, check out #4 on this assignment.

http://www.williampolley.com/econ231/files/hw231_1.pdf

I took great pains to word it as unambiguously as possible, and I wrote it before having this discussion. It's similar to problems I've used for a long time. Let me know if you like it (or if you don't)!