Opportunity Cost, Excess Profit, and Counterfactual Conditionals

Abstract

Counterfactual conditionals are cognitive tools that we incessantly use during our lives for judgments, evaluations, decisions. Counterfactuals are used for defining concepts as well; an instance of this is attested by the notions of opportunity cost and excess profit (residual income), two all-pervasive notions of economics: They are defined by undoing a given scenario and constructing a suitable counterfactual milieu. Focussing on the standard paradigm and Magni’s (2000, 2005, 2009a,b) proposal this paper shows that the formal translation of the counterfactual state is not univocal and that Magni’s model retains formal properties of symmetry, additive coherence, homeomorphism, which correspond to properties of frame-independence, time invariance, completeness. Two introductory studies are also presented to illustrate how people cope with these counterfactuals and ascertain whether either model is seen as more “natural.” A brief discussion of the results obtained is also provided.

Keywords: Opportunity cost, excess profit, residual income, counterfactual, modeling

JEL Classification: A12, B41, D40, G11, G12, G31, M41