This a continuation of Monday’s post.
In the comments of this post by Scott Sumner he links to an exercise of opportunity costs (note that this is apparently not the question that stumped nearly 80% of economists at an AEA convention, but is apparently similar[?]).
Prof. Jungshik Sonof Hanyang University (Seoul) asks:
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?
Fellow False Symmetry blogger Robert Simione wrote:
Mr. A will have an infinite payoff unless the rate of inflation is positive and increasing. Mr. B will have an infinite payoff unless inflation is positive and Mr. C. may get included in a few more wills i guess, but all in all it seems like a question with incomplete information.
I agree with his assessment of the relevant opportunity costs. If its possible to predict the rate of return on A & B’s investments, then we can say their potential profits (and therefore opportunity costs) will be infinite for an undefined (presumably infinite) number of periods. Of course, reality rarely works like this and so there must be some real, finite, opportunity cost, which happens to be incalculable because we cannot predict future conditions. Mr. C’s costs present an interesting problem, because his potential gain is even more incalculable than A and B. It cannot be defined by any direct monetary amount – even if he does increase his financial capital via improving his ‘human capital‘ – and it’s harder to predict human intention than market processes (I think).
So I agree that this is a question without enough information. But the question I pose takes this one step further: Is there any real situation (or even a realistic theoretical scenario) where it is possible to accurately calculate real opportunity costs?