A Deaf Pickpocket and a Bob Dylan Concert

In a 9/2005 post entitled Opportunity Cost, Marginal Revolution reported on the apparent failure of economists of all levels to agree on the answer to an apparently simple problem involving opportunity cost.

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.

The claim is that the correct answer is (b) $10.

Included in a couple of previous posts on opportunity cost, here, and here, is a definition of opportunity cost as follows :

The opportunity cost of a choice or action ‘A’ is the projected benefit of choice or action ‘B’, the highest ranked alternative choice or action which is precluded by ‘A’. The precluded benefit of ‘B’ is in general a packaged combination of both desirable and undesirable effects, and only rarely reducible to a net number of some kind. Neither the choice nor the precluded projected benefit are necessarily a part of an objective reality, but are entirely subjective judgments made by the chooser or actor at the moment of choice or action.

As stated, the problem does not indicate any motive for considering attending the Dylan concert, presumably assuming a desire to hear the live performance, and restricts the answer set to amounts of dollars.

Using the definition of opportunity cost above, it would be the combination packaged benefit of attending the Dylan concert, i.e. the desired effect of being present at the concert and the undesired effect of paying $40 for a ticket.

In order to reduce this to a single dollar amount, it is necessary to measure the subjective value of being present at the concert with a dollar price. For many reasons, this is invalid. All economic values are subjective, and cannot be measured by price.

If, on the other hand, we add the qualification that you are a professional pickpocket, who is deaf and derives no value from hearing the concert, then dollars can make sense.

If you say that you would spend no more than $50 for a ticket, this would mean that you expect the pickings to be rich in the concert crowd, and spending anything less than $50 for a ticket would yield better results than any other alternate working area, and the results would make it worthwhile to expend two hours at work as opposed to two hours of leisure. Since the ticket only costs $40, the net benefit is $10, and this would indeed be the opportunity cost of using your free ticket to the Clapton concert.

In general, prices cannot be equated to values. Prices are fragments of history. If a given purchase of a good has been made at $X, all that we can say about the purchaser is that, at the moment of purchase, he preferred the addition of the good to the keeping of the $X. The extent and intensity of that preference cannot be known.

Always reducing an opportunity cost to dollars is logically equivalent to saying that a barter economy can't have opportunity costs.

If the opportunity cost in this problem were actually $10, then I should be able to bribe you into not attending the Dylan concert by offering you $11 for an enforceable promise not to attend. In fact, I can expand the terms of the promise to include every possible alternate activity which would be precluded by attending the Dylan concert, all of its possible oportunity costs.

For example, if you don't attend the Dylan concert you may watch it at home on TV. [But I can prevent you from doing that as well for the same $11. ED - on further review, this is nonsense, each opportunity must be paid for. ] I couldn't prevent you from making a DVR recording, however.

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On any given day, you would

On any given day, you would be willing to pay up to $50 to see Dylan.

Let's call that premise # 1.

Premise # 2:

On any given day, you would also be willing to pay up to $50 to see Rolling Stones. You are indifferent between seeing Dylan and the Stones.

Premise # 3:

Dylan and the Stones are both playing at the same time for $50.

Premises 1 and 2 don't seem contradictory on their face, but given premise 3 it seems that either 1 or 2 will turn out to be false - we have a given day where you will not be willing to spend $50 to see one of the two acts.

Always reducing an

Always reducing an opportunity cost to dollars is logically equivalent to saying that a barter economy can’t have opportunity costs.

I'd phrase that slightly differently...

Insisting on measuring opportunity costs in dollars implies that opportunity costs cannot be accurately measured in a barter economy.

Isn't that true?

George, Insisting on

George,

Insisting on measuring opportunity costs in dollars implies that opportunity costs cannot be accurately measured in a barter economy.

Isn’t that true?

Yes, as far as it goes.

The real issue is that neither opportunity costs nor economic values can be measured at all. Measurement normally implies some sort of a fixed standard. As with any other good, money varies in significance from moment to moment for every individual and from every individual to another.

Regards, Don

I think you're being

I think you're being overcritical of the problem. When the problem states that on any given day you'd pay up to $50 to see the concert, it means that you're indifferent between the concert and $50-worth of other goods. You're right that not all opportunity costs can be measured in dollar terms (as your barter economy example demonstrates), but in some cases they can, and the information that you're indifferent between the concert and $50-worth of other goods makes this such a case.

The goal of the example, which I think it accomplishes, is to see whether economists are fully aware that a forgone opportunity involves both forgone benefits and forgone costs. Putting everything in dollar terms is helpful for isolating this question.

Also, your deaf pickpocket modification doesn't quite work. In addition to paying the $40 to get in, the pickpocket must also spend his time and effort. To put a dollar value on the pickpocket's opportunity cost, you'd have to put a dollar value on his time and effort. If you're unwilling to do that (as your opposition to putting a dollar value on enjoyment of the concert would seem to imply), then your pickpocket modification is just as problematic as the original version of the story.

Glen, I think you’re being

Glen,

I think you’re being overcritical of the problem.

Possibly.

When the problem states that on any given day you’d pay up to $50 to see the concert, it means that you’re indifferent between the concert and $50-worth of other goods.

This doesn't properly account for the utility and usefulness of money. You're not really giving up other goods, but are reducing your provision for dealing with an uncertain future. If you typically carry around $200 in cash, and keep your checking account above some minimum value, you are likely to do so as long as you live and never actually spend the totals down to zero. If I stop you on your way out of the house in the morning and ask you for 90% of your cash, promising to return it tomorrow, agreeing is likely to make you uncomfortable even if on normal days you never spend more than 10% of the total. It is the removal of this discomfort that is the utility of holding money to deal with emergencies or opportunities that may pop up unpredictably.

Also, your deaf pickpocket modification doesn’t quite work. In addition to paying the $40 to get in, the pickpocket must also spend his time and effort. To put a dollar value on the pickpocket’s opportunity cost, you’d have to put a dollar value on his time and effort. If you’re unwilling to do that (as your opposition to putting a dollar value on enjoyment of the concert would seem to imply), then your pickpocket modification is just as problematic as the original version of the story.

I don't think so. The pickpocket is making a business decision, as opposed to a subjective consumption decision. In doing so, it is entirely proper to measure the projected results in dollars, which means that the opportunity cost can be netted with arithmetic. His decision on how to divide his time between work and leisure, which is necessary whether the concert exists or not, doesn't require me, or even he to place a dollar price on his leisure since he doesn't need to buy it on a market.

You need to include

You need to include information on how much money I have. If I don't have the $40 for the ticket then there is no opportunity to go to the Dylan concert and therefore no opportunity cost.

They might be having a rock bottom sale on multi-million dollar yachts today but since they are out of my price bracket the savings is not an opportunity cost for me.

I guess they did include the

I guess they did include the information that I had $40 by saying the Dylan concert was my "next best activity", so my wise-ass response fails, damn-it.