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 you use the frequent-flyer coupon to fly to Atlanta, would you get any economic surplus by making the trip?

Question

Quizplus · Accepted Answer

If you use the frequent-flyer coupon for the Miami trip, you would have to pay $1000 ($600 airfare - $500 coupon + $900 other costs), which is within your budget of $1400 but would not generate any economic surplus since the most you were willing to pay was $1400. If you use the coupon for the Atlanta trip, you would save $450 on airfare, but you would not receive any economic surplus because you were not willing to pay for the trip in the first place. In fact, you would still have to spend $950 ($450 airfare + $500 coupon) for a trip that you did not want to take, resulting in a loss of $50 ($1400 budget - $950 spent). Therefore, the best choice is not to use the frequent-flyer coupon at all and save it for another trip that you actually want to take.

Your Classmates from the University of Chicago Are Planning to Go