Your classmates from the University of Chicago are planning to go to Miami for s

Question

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 round­trip airfares are $600, but you have a frequent­flyer 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 frequent­flyer 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 Chicago­Atlanta round­trip airfares are $450. If the Chicago­Atlanta round­trip air fare were $350, should you use the coupon to go to Miami ?

Explanation / Answer

ANSWER:

Yes, should use the coupon to go to Miami. There will be an economic surplus of $50. If you apply the coupon, which now has an opportunity cost of $350 (the alternative use of the coupon) then the Miami trip now "costs" $1350 [= $350 + $100 (the balance of the $600 ticket price) + $900]. Thus as the value the trip is $1400, there is a gain surplus of $50.

Because if you don't use your frequent-flyer coupon, then the total cost is $600 + $900 = $1500, however the benefit is only $1400. Thus the coupon should be used

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