My wife and I are heading on a trip to Wisconsin. Being the amazing trip planner

Question

My wife and I are heading on a trip to Wisconsin. Being the amazing trip planner that I am, I pre-booked all of our hotels rooms ahead of time (and all of them have non- refundable deposits). A close friend finds out we are heading that way and tells us we can stay at their house if we would like instead of staying at the hotel. My wife hasn’t seen this friend in forever, but she says we can’t stay because we already paid for a hotel room and we don’t want to waste it.

Since you took my class, I decided to get a second opinion on the matter. What should my wife and I do from an economic perspective? Why (make sure to support your answer with economic concepts from class)?

Explanation / Answer

There are two options, one to go with the booked hotel and second to accept the friend's offer. The couple will rank the options. First rank is given to the hotel which has already been booked and the amount is non refundable. if this option is choosen the OPPORTUNITY COST is zero. The reason being that the room bears no cost. So overall it means that going for the booked hotel will mean no lost amount. If the couple goes to the friend's house this option will have opportunituy cost equal to the amount given to the hotel for pre-booked room.

Considering the opportunity cost the couple should go for already booked room.

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