Question

You would like to go to Miami for vacation, but you are undecided about whether you should go. 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 a trip to Atlanta for a wedding, which you must attend. Atlanta round-trip airfares are $450.

Required:

a. Should you go to Miami?

b. What is the opportunity cost of using the coupon for the Miami trip?

Answer 1

Step-by-step explanation:

To determine whether you should go to Miami and calculate the opportunity cost of using the coupon, let's analyze the costs and compare them to your willingness to pay:

a. Should you go to Miami?

Calculate the total cost of the Miami trip:

Round-trip airfare to Miami: $600

Other costs for the vacation: $900

Total cost of the Miami trip: $600 + $900 = $1500

Compare the total cost to your willingness to pay:

Your maximum willingness to pay: $1400

Since the total cost of the Miami trip ($1500) exceeds your maximum willingness to pay ($1400), it would not be advisable to go to Miami. The trip is beyond your budgetary limit, considering all the costs involved.

b. What is the opportunity cost of using the coupon for the Miami trip?

The opportunity cost is the value of the best alternative forgone when a particular choice is made. In this case, the alternative use of the frequent-flyer coupon is a trip to Atlanta for a wedding.

Calculate the cost of the Atlanta trip without using the coupon:

Round-trip airfare to Atlanta: $450

Calculate the cost of the Atlanta trip if you use the coupon:

Round-trip airfare to Atlanta - value of the coupon: $450 - $500 = -$50

Since the coupon's value exceeds the cost of the Atlanta trip, you would actually receive $50 in savings by using the coupon for the Atlanta trip.

Therefore, the opportunity cost of using the coupon for the Miami trip is the savings of $50 that you would have received by using the coupon for the Atlanta trip instead.

In summary, it is not advisable to go to Miami due to the trip's cost exceeding your budgetary limit. The opportunity cost of using the coupon for the Miami trip is $50 in savings that you would have received by using the coupon for the Atlanta trip instead.