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Shin likes to spend a (relatively small) portion of his income on vacations to Cabo San Lucas (a ...

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Shin likes to spend a (relatively small) portion of his income on vacations to Cabo San Lucas (a ...

Shin likes to spend a (relatively small) portion of his income on vacations to Cabo San Lucas (a popular resort area in Mexico). On these trips, he either stays at a four star resort with panoramic ocean views or a more modest, and slightly deteriorating hotel in the noisy part of town. Understandably, the four star hotel is significantly more expensive. Suppose that the four-star hotel costs $5000/trip while the hotel costs just $500/trip. In recent years, the price of airfare has risen significantly, a change that effects the cost of his trips the same regardless of where he stays. Suppose that airfare has increased from $300/trip to $1000/trip. Why is it that following the higher travels prices, Shin is likely to spend more of his vacations at the four star resort when he travels. (Assume that the hotel rates and Shin's preferences are fixed).

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Microeconomics: Theory and Applications with Calculus

Edition: 4^th

Author: Perloff

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