Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance or an Arbitrary Concept?

[Author Affiliation]Joel Potter, , , , jmpotter@northgeorgia.eduShane Sanders, , , , sd-sanders@wiu.edu[Acknowledgment]Thank you to Dr. John L. Scott, Dr. Laura Razzolini (Editor), and two anonymous reviewers for helpful comments and suggestions.1. IntroductionIn an influential article, Ferraro and Taylor (2005) ask a large sample of PhD students and economists "a very simple question that tests their understanding of opportunity costs" (p. 1). Here is the question in its entirety: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 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 D. $50Ferraro and Taylor defend answer B ($10) as correct in the following passage:Given the correct answer was the least popular, we believe it worthwhile to state why $10 is the opportunity cost of seeing Eric Clapton. When you go to the Clapton concert, you forgo the $50 of benefits you would have received from going to the Dylan concert. You also forgo the $40 of costs that you would have incurred by going to the Dylan concert. An avoided benefit is a cost, and an avoided cost is a benefit. (2005, p. 4)Ferraro and Taylor (2005) acknowledge that the question was adapted from p. 4 of Frank and Bernanke's textbook, Principles of Microeconomics (2001). Subsequently, Frank approves of the question's adaptation in the introduction of his popular economics book, The Economic Naturalist (2007b, p. 5), and reaffirms that the uniquely correct answer may be derived via a basic understanding of opportunity cost. The 199 economists who answered the adapted question responded as follows: A. $0 (50 responses); B. $10 (43 responses); C. $40 (51 responses); D. $50 (55 responses).In response to the Ferraro and Taylor study, Becker (2007, p. 14) poses the following open question, "Could it be that graduate textbooks, as in my presentation on the shadow prices of teaching and research, have correctly given up on the introductory economics course idea of an opportunity cost in favor of more useful measures of price?"1 Further, Margolis (2007) states, "But this does not really show that professors of economics have a grossly inadequate grasp of a routine technical term in their discipline, only that Ferraro and Taylor's rather odd question happens to trigger the sort of cognitive mechanism that accounts for illusory responses elsewhere" (p. 104).Challenging the notion that the previous question "is straightforward and should not require great cognitive effort by PhD-level economists" (Ferraro and Taylor 2005, p. 6), we use standard economic assumptions to show that any of the four responses can be defended as correct.2 In light of alternative interpretations, we argue that the question is not an appropriate instrument from which to gauge understanding of economic cost and related concepts. Moreover, we contend that opportunity cost accounting is sufficiently arbitrary to preclude it from reliably indicating one's understanding of marginal analysis. In fairness to Ferraro and Taylor, we suggest several difficulties involved in framing a valid question on opportunity cost.Colander, Gaastra, and Rothschild (2010) present a pedagogical analysis of the "top-down" (e.g., centralized) and "bottom-up" (e.g., decentralized) costs of market restrictions. In so doing, the authors are able to texture the pedagogical analysis of a traditional economic concept. This article seeks the same general end in its treatment of opportunity cost accounting and logic. …