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 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. what is the opportunity cost of using the coupon for the miami trip? $100 $450 $500 $550

Answer 1

Since the $450 airfare to Atlanta has been mandated, the student will pay that cost in one manner or the other - either with cash or with the coupon. If the student uses the coupon for the Spring Break trip, then they will have to pay the $450 with cash, and total cash expenditure will be $450. However, if they do not go on the Miami trip, then they will pay for the Atlanta flight with the coupon and there will be zero out-of-pocket cash expenditure. Thus the opportunity cost of using the coupon for the Miami trip is $450.