Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfares are $600, but you have a frequent-flyer coupon worth $500 that you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfares are $450. If the Chicago-Atlanta round-trip air fare were $350, should you use the coupon to go to Miami?

Question

Quizplus · Accepted Answer

Using the frequent-flyer coupon to go to Miami would bring down the cost of airfare to $100 ($600 - $500 coupon), and the total cost of the trip would be $1000 ($100 + $900). Since the most you are willing to pay for the trip is $1400, your economic surplus would be $400 ($1400 - $1000).

If the Chicago-Atlanta round-trip airfare were $350, the cost of the Atlanta trip would be $150 ($350 - $500 coupon), which is less than the cost of going to Miami. Therefore, it would be better to use the coupon for the Atlanta trip and pay full price for the Miami trip. This way, the cost of the Atlanta trip would be reduced to $150, and the cost of the Miami trip would be $1500 ($600 airfare + $900 other costs). Since this is more than the most you are willing to pay, choosing not to go to Miami would be the best choice.

Your Classmates from the University of Chicago Are Planning to Go