Opportunity cost

What should be one of the most important goals of teaching introductory economics courses?
Robert H. Frank in a NY Times column suggests it should be to “teach how to weigh costs and benefits intelligently”. Weighting costs and benefits intelligently requires, among other things, a thorough understanding of the concept of opportunity cost.

A recent study by Ferraro and Taylor of Georgia State University suggests that most professional economists may not really understand what opportunity cost means.

The authors asked about 200 professional economists 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, or (d) $50.

[Test your understanding – find the answer here]

Only 21.6% of the professional economists picked the right answer, “a smaller percentage than if they had chosen randomly.” Frank observes.
The same question was posed to college students and, to the authors’ surprise, students who had never taken a course in economics outperformed those who had, the former group having 17.2 % right answers and the latter only 7.4 %.

What do we learn from these results?

Frank suggests that professional economists’ poor performance is related to the fact that during their training as economists they were exposed to encyclopedic introductory economics courses, with focus on mathematical models that “prove daunting for many students and leave them little time and energy to focus on how basic economic principles help explain everyday behavior” . The same encyclopedic courses are taught today, time for a change? Frank thinks so and suggests how in The Economist Naturalist: Teaching Introductory Students How to Speak Economics American Economic Review, May 2002 , v. 92, iss. 2, pp. 459-62.

References

Ferraro, Paul J. & Taylor, Laura O. 2005.Do Economists Recognize Opportunity Cost When They See One? A Dismal Performance from the Dismal Science, Georgia State University.

Frank, Robert H. 2002. The Economist Naturalist: Teaching Introductory Students How to Speak Economics American Economic Review, v. 92, iss. 2, pp. 459-62.

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