Question

The most Eric would be willing to pay to take a ski vacation over spring break is $2,000. He purchases a plane ticket, a room, and a ski pass for a total of $1,500. Suppose a friend says “Sell me the travel, room, and lift tickets. I will pay you $2,500.” Which of the following best describes the situation?
A.It is rational for Eric to go skiing as the cost is $1,500 plus the value of what he would have done.

B. If it was rational for Eric to go in the first place, it is still rational.

C.It is not rational for Eric to go skiing as the cost has risen to $500 plus the value of what he would have done.

D.It is not rational for Eric to go skiing as the cost has risen to $1,000 plus the value of what he would have done.

E.It is not rational for Eric to go skiing as the cost has risen to $2,500 plus the value of what he would have done.

Answer 1

The correct answer is D.

The cost has risen 1,000$ (comparting the 1500$ he had paid, with the 2500$ his friend has offered for the vacation, 1000$ is the amount he would miss if rejecting the offer plus the value of the activity he would do instead of the skiing vacation).

This cost rise represents the concept of opportunity cost. It is referred, when making a decision, to the value that is missed when rejecting the alternative option.