[fivestarstar]

Let's say Joe Bloggs goes to a concert that costs him $500 and lasts for three hours. He could also have spent those three hours at a football match that costs him $600, and that is the highest-valued option forgone. What's the full cost in this situation? The explicit cost is $500, but what about the implicit cost?

[ArcSine]

In addition to the 500 in cash, what else did Joe give up in order to attend the concert?

As a side note, Joe might want to consider moving to an area where entertainment costs are more reasonable :-)

[fivestarstar]

In terms of time, he gave up the value of the football match.

In terms of money, though... he gave up spending $600? Gave up -$600? That's where I'm confused.

By the way, those aren't in US Dollars, but HK Dollars. :D

[ArcSine]

Ah, ≈ $64.5 USD for a concert and ≈ $77.5 USD for a game... now that's more like it :-)

The way to value the forgone football game is to determine the excess of Joe's "entertainment utility" of attending the game, over the $600 cash cost to attend.

Easy to say, difficult to do in practice. But suppose we could experiment with a range of football ticket prices, and we find that Joe is just indifferent between paying $645 for a ticket to the game, vs skipping the game. In other words, his responses to, "Would you pay $___ for a ticket?" was "yes" for 620, 630, and 640; it was "no" for 650, 660, (or anything higher); and it was "lemme think about it" for 645. So we guess that Joe feels he'd get about $645 worth of enjoyment attending the game, when put into dollar terms.

Then the net benefit of going to the game is $45, the excess of his "dollar-denominated enjoyment level" over his cash cost for the ticket.

Hence Joe's opp'y cost of going to the concert is $545. Note that his decision implies that he believes his "entertainment utility", in dollar terms, for the 3 hours at the concert must be ≥ 545.

You might find this article of interest. Skip down to the part about the question that was asked of economists at the 2005 AEA meeting.

[fivestarstar]

Ah, ≈ $64.5 USD for a concert and ≈ $77.5 USD for a game....now that's more like it :-)

The way to value the forgone football game is to determine the excess of Joe's "entertainment utility" of attending the game, over the $600 cash cost to attend.

Easy to say, difficult to do in practice. But suppose we could experiment with a range of football ticket prices, and we find that Joe is just indifferent between paying $645 for a ticket to the game, vs skipping the game. In other words, his responses to, "Would you pay $___ for a ticket?" was "yes" for 620, 630, and 640; it was "no" for 650, 660, (or anything higher); and it was "lemme think about it" for 645. So we guess that Joe feels he'd get about $645 worth of enjoyment attending the game, when put into dollar terms.

Then the net benefit of going to the game is $45, the excess of his "dollar-denominated enjoyment level" over his cash cost for the ticket.

Hence Joe's opp'y cost of going to the concert is $545. Note that his decision implies that he believes his "entertainment utility", in dollar terms, for the 3 hours at the concert must be ≥ 545.

You might find this article of interest. Skip down to the part about the question that was asked of economists at the 2005 AEA meeting.

Thanks! That's really complicated, though I think I do understand it, thanks to your clear explanations. Fortunately, utility is explicitly excluded from my city's economics curriculum, so I won't be asked this type of question in examinations. Interesting link, by the way!

[ArcSine]

Yeah, I thought you'd get a kick out of the article, since the hypothetical question that was put to the economists gathered at the AEA gathering was nearly identical to your Joe Bloggs question.

It answered the question more clearly than I did, as well. I probably should have avoided the reference to "utility", as it's a concept that really added very little, um, utility to my explanation.

The point is, to determine the opp'y cost of skipping the football, you'd have to know how much value Joe places on the enjoyment he'd obtain by attending. I made up the $645 amount just as an example: I assumed we knew somehow that Joe figures he'd get about $645 worth of enjoyment from being at the game. Since it costs him $600 to attend, then attending the game produces a net benefit to Joe of $45.

Therefore, in going to the concert he gives up $500 in the form of cash, and $45 in the form of the net benefit he'd have obtained, had he gone to the game instead; hence the full economic cost of the concert (to Joe) is $545.

But your original question doesn't tell us how much enjoyment-value Joe places on attending the football game. Thus, the best you can do for an answer is to say that the explicit cost is $500, whereas the implicit cost is the net benefit Joe would've obtained from the game, which in turn is the excess of his 'enjoyment value' (whatever that number might be) over the $600 cost of the ticket.