The "stand-up economist" Yoram Bauman used the concept of opportunity cost to make the following joke:
[S]omebody offers you a choice between a Snickers bar and a package of M&Ms. Suppose, for the sake of argument, that you take the M&Ms. According to Mankiw, the cost of those M&Ms is the Snickers bar that you had to give up to get the M&Ms. Your gain from this situation—what economists call “economic profit”—is therefore the difference between the value you gain from getting the M&Ms (say, \$.75) and the value you lose from giving up the Snickers bar (say, \$.40). In other words, your economic profit is only \$.35. Although you value the M&Ms at \$.75, having the choice of the Snickers bar reduces your gain by \$.40….
Indeed, the more choices you have, the worse off you are. The worst situation of all would be somebody coming up to you and offering you a choice between two identical packages of M&Ms. Since choosing one package (which you value at \$.75) means giving up the other package (which you also value at \$.75), your economic profit is exactly zero! So being offered a choice between two identical packages of M&Ms is in fact equivalent to being offered nothing.
There are two problematic claims here:
- Being offered a choice between two identical packages of M&Ms is equivalent to being offered nothing.
The resolution to this is, I think, fairly straightforward - Bauman is intertwining utility and opportunity cost in a deliberately erroneous manner. In most standard utility functions, one's utility depends on absolute consumption rather than the value of the next best alternative. As such, one's utility from a choice between two identical packages of M&Ms is identical to utility from one package of M&Ms (without choice), and is strictly greater than consuming nothing at all.
- The more choices you have, the worse off you are.
I'm having a hard time finding the exact problem with this statement as it is constructed in the joke. The reason is because consumer surplus (though not utility) does fall as the value of the next best alternative increases. As such, as long as new choices do not dominate the current best choice, additional choices can only decrease consumer surplus. What is wrong with this line of reasoning?