Last night I met some classmates in the Wisconsin Evening MBA program out for beers after class at a college bar (The Church Key) on University Ave. Some folks that arrived before me had found the $2 pitchers of Bud Light too cheap to resist, so there were already four or five pitchers circulating among the group. I had a decision to make: drink bad beer (for free!) or pony up for a $4 pint of Lake Louie Milk Stout, the beer I truly craved.
Having just completed an economics exam, I decided to try and apply the concepts of sunk cost and opportunity cost to the problem. Sunk cost is basically the theory that unrecoverable money spent is "sunk" and not relevant in future decision making. For example, if I bought a ticket to a concert for $30 but then lost it, I should just bite the bullet and purchase another ticket. I was willing to pay $30 to see the show before and I should be willing to pay the same amount now. The money I spent on the original ticket is gone and shouldn't have any bearing on my new decision.
Opportunity cost is a little more difficult to wrap your head around. Let's say you won a free ticket to see Eric Clapton and the ticket has no resale value. Bob Dylan is performing on the same night and is your best alternative activity. Tickets to see Dylan cost $40, and on any given day you would be willing to pay $50 to see Dylan. In this scenario, your opportunity cost of seeing Clapton is $10, because you are giving up that $10 of surplus value you would have gotten had you seen Dylan.
Okay, so back to the beer. I figure the money spent on that Bud Light is sunk, so it doesn't figure into my decision. On any given day, I'd pay up to $5 for a pint of really good beer, so I'm getting a $1 surplus on the $4 pint of Lake Louie. That means the opportunity cost of drinking the Bud Light is actually $1 (not free). Since Bud Light is worth zero dollars to me, the correct economic decision is to buy the good beer, which is exactly what I did.
You may be saying to yourself, "that sounds like a lot of nonsense." Perhaps. And what, you may ask, about the law of never turning down free beer? Or does the law of "life is too short to drink bad beer" supersede that law? Such are the complexities of the economics of beer.
2 comments:
People should only drink light beer to be polite when its offered by folks you don't know that well. In all other instances it should be viciously and vociferously savaged. Thirty plus years ago I took a young lady to the newly opened Church Key. No points were made however, because a couple years earlier her grandma had been laid out there when it was a funeral home.
The Church Key is actually a really neat bar in a cool building. The only problem is that I'm only 28 and I was the oldest person in the joint, including the staff.
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