Comments on: Opportunity Costs http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/ The Sweet Release of Reason Tue, 22 May 2012 20:28:45 +0000 hourly 1 By: Kenny Easwaran http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1911 Kenny Easwaran Thu, 11 Nov 2004 22:45:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1911 I think you're right about the fact that buying the TV had an opportunity cost of (whatever it is he would do with) $2000, but once he's bought it, the opportunity cost of keeping it is $3000, rather than $1000 (what he could have gotten from selling it) (or whatever else it is he might have done with a TV). Keeping the TV doesn't undo the $2000 purchase. I think the confusion is that people equivocate between opportunity cost as what the benefit of the second-best option would have been, versus the difference in benefit between the chosen option and the next best option. In addition, there are two clear choices for second-best option. The $1000 comes from differences, the $2000 from the choice of not having bought it, and the $3000 from the choice of buying it but not having sold it. I think you’re right about the fact that buying the TV had an opportunity cost of (whatever it is he would do with) $2000, but once he’s bought it, the opportunity cost of keeping it is $3000, rather than $1000 (what he could have gotten from selling it) (or whatever else it is he might have done with a TV). Keeping the TV doesn’t undo the $2000 purchase.

I think the confusion is that people equivocate between opportunity cost as what the benefit of the second-best option would have been, versus the difference in benefit between the chosen option and the next best option. In addition, there are two clear choices for second-best option. The $1000 comes from differences, the $2000 from the choice of not having bought it, and the $3000 from the choice of buying it but not having sold it.

]]> By: Glen http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1910 Glen Thu, 11 Nov 2004 03:25:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1910 Will -- you're correct. However, as shorthand, we economists often like to be able to specify opportunity cost in dollar terms, so we can say "$2000" instead of "whatever you would have done with $2000." Also, if you want to get really philosophical, ask yourself if it makes sense to speak of the utility of the forgone option if there is only ordinal (not cardinal) utility. If I choose option A over option B, an ordinal utility approach simply says that I (presumably) prefer A to B, but it doesn't attach any absolute value to either one. So what does it mean to talk about the utility of the forgone option B? (I think there's a reasonable answer to this question, but it requires being more careful with language than we usually are.) Will — you’re correct. However, as shorthand, we economists often like to be able to specify opportunity cost in dollar terms, so we can say “$2000″ instead of “whatever you would have done with $2000.”

Also, if you want to get really philosophical, ask yourself if it makes sense to speak of the utility of the forgone option if there is only ordinal (not cardinal) utility. If I choose option A over option B, an ordinal utility approach simply says that I (presumably) prefer A to B, but it doesn’t attach any absolute value to either one. So what does it mean to talk about the utility of the forgone option B? (I think there’s a reasonable answer to this question, but it requires being more careful with language than we usually are.)

]]> By: David Rossie http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1909 David Rossie Wed, 10 Nov 2004 23:10:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1909 I over-analyzed the question, but my interpretation of opportunity cost is cost plus forgone income. So, utility you would have gained from the second-best use, AND the explicit cost. I over-analyzed the question, but my interpretation of opportunity cost is cost plus forgone income. So, utility you would have gained from the second-best use, AND the explicit cost.

]]> By: David Rossie http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1905 David Rossie Wed, 30 Nov -0001 00:00:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1905 I over-analyzed the question, but my interpretation of opportunity cost is cost plus forgone income. So, utility you would have gained from the second-best use, AND the explicit cost. I over-analyzed the question, but my interpretation of opportunity cost is cost plus forgone income. So, utility you would have gained from the second-best use, AND the explicit cost.

]]> By: Glen http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1906 Glen Wed, 30 Nov -0001 00:00:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1906 Will -- you're correct. However, as shorthand, we economists often like to be able to specify opportunity cost in dollar terms, so we can say "$2000" instead of "whatever you would have done with $2000." Also, if you want to get really philosophical, ask yourself if it makes sense to speak of the utility of the forgone option if there is only ordinal (not cardinal) utility. If I choose option A over option B, an ordinal utility approach simply says that I (presumably) prefer A to B, but it doesn't attach any absolute value to either one. So what does it mean to talk about the utility of the forgone option B? (I think there's a reasonable answer to this question, but it requires being more careful with language than we usually are.) Will — you’re correct. However, as shorthand, we economists often like to be able to specify opportunity cost in dollar terms, so we can say “$2000″ instead of “whatever you would have done with $2000.”

Also, if you want to get really philosophical, ask yourself if it makes sense to speak of the utility of the forgone option if there is only ordinal (not cardinal) utility. If I choose option A over option B, an ordinal utility approach simply says that I (presumably) prefer A to B, but it doesn’t attach any absolute value to either one. So what does it mean to talk about the utility of the forgone option B? (I think there’s a reasonable answer to this question, but it requires being more careful with language than we usually are.)

]]> By: Kenny Easwaran http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1907 Kenny Easwaran Wed, 30 Nov -0001 00:00:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1907 I think you're right about the fact that buying the TV had an opportunity cost of (whatever it is he would do with) $2000, but once he's bought it, the opportunity cost of keeping it is $3000, rather than $1000 (what he could have gotten from selling it) (or whatever else it is he might have done with a TV). Keeping the TV doesn't undo the $2000 purchase. I think the confusion is that people equivocate between opportunity cost as what the benefit of the second-best option would have been, versus the difference in benefit between the chosen option and the next best option. In addition, there are two clear choices for second-best option. The $1000 comes from differences, the $2000 from the choice of not having bought it, and the $3000 from the choice of buying it but not having sold it. I think you’re right about the fact that buying the TV had an opportunity cost of (whatever it is he would do with) $2000, but once he’s bought it, the opportunity cost of keeping it is $3000, rather than $1000 (what he could have gotten from selling it) (or whatever else it is he might have done with a TV). Keeping the TV doesn’t undo the $2000 purchase.

I think the confusion is that people equivocate between opportunity cost as what the benefit of the second-best option would have been, versus the difference in benefit between the chosen option and the next best option. In addition, there are two clear choices for second-best option. The $1000 comes from differences, the $2000 from the choice of not having bought it, and the $3000 from the choice of buying it but not having sold it.

]]> By: Catallarchy http://willwilkinson.net/flybottle/2004/11/10/opportunity-costs/#comment-1908 Catallarchy Wed, 30 Nov -0001 00:00:00 +0000 http://www.willwilkinson.net/flybottle/?p=525#comment-1908 <strong>I Don't Get It</strong> Will Wilkinson proudly proclaims that his "interpretation" of the opportunity cost puzzle is correct. Yet, I don't see what Will's disagreement is. I think just about everyone who participated on the thread knows that when someone says, "The opp... I Don’t Get It

Will Wilkinson proudly proclaims that his “interpretation” of the opportunity cost puzzle is correct. Yet, I don’t see what Will’s disagreement is. I think just about everyone who participated on the thread knows that when someone says, “The opp…

]]>