Re: Any formula to Calculate an Opportunity Cost?

From: panz (panz@wcsu.edu)
Date: Thu Sep 15 2005 - 08:15:59 CDT

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    Instead of providing the answer, let me throw in more questions.

    This concept is notoriously fuzzy when we start to get technical about it.

    At recent AEA meeting, Ferraro and Taylor of Georgia State University set up a similar question to test the professionals' understanding of the concept of opportunity cost. According to their finding, among 200 economists they surveyed, only 21.6% chose the correct answer.
    This is discussed by Robert Frank in a NYT article to address the problem of poor quality of economic education.

    I've also noticed the discrepancy in various textbooks' examples illustrating the concept. E.g., in terms of education, some say the opportunity cost is the potential salary income you'd have earned but given up because of the decision to go to college. Some say the opportunity cost includes that potential salary as well as the college tuition, which is hard to reconcile with the definition of opportunity cost itself.

    - Zuohong Pan

    Professor of Economics
    Western Connecticut State Univ.
    Danbury, CT 06810



    ¼ÕÁ¤½Ä wrote:

    Web Bug
     Dear Colleagues:


    In economics, we are teaching our students that the economic cost of one item means "the opportunity cost, that is, what you give up to get that item."(Mankiw) Of course, what you give up is the best alternative(opportunity) forgone.


    College Principles professors would give an example to go to a movie, saying one's cost to go to a movie should include the opportunity cost of her/his time to watch the movie in addition to the ticket price. Simple and Obvious!


    Recently the following questions were raised during a summer camp with middle and high school teachers who were teaching economics to the kids. There were a few college professors in the camp and we could not come up to the same figures. Please show us a simple method or formula to calculate an opportunity cost of a decision, such as buying a refrigerator.


    Suppose Mr. A, B and C would like to buy one refrigerator costing $1,000. The best alternative forgone for each of them are as follows: Mr. A would have deposited the money at the bank which pays 10% interest per year. Mr. B would have built a parking facility on his own land with the money from which he would expect net income of $10 per month. Mr. C would have treated lavish dinner costing $1,000 for his large families. In this case, what would be the opportunity cost to buy the refrigerator for Mr. A, B and C, respectively?


    Sonny



    Prof. Jungshik Son

    Economics Department

    Hanyang University

    Seoul, Korea

    jsonny@hanyang.ac.kr


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