The Rise of the Staycation

EconEye Admin

4 years ago

Staycation is a closer-to-home vacation. With higher gas prices, some families don’t want to drive as far as they previously would. For many families, less money spent on gas means more trips closer to home with more to spend on tours and food.—travelplus.com

Answer the following questions to check your understanding of the story.

1) The Adamson family have a $5,000 annual budget to spend on staycations and vacations further from home. What is the effect of the rise in the price of gas on marginal utility per dollar from vacations further from home and staycations?

The family’s marginal utility per dollar from vacations further from home _____________ and their marginal utility per dollar from staycations _______________.

a) doesn’t change; doesn’t change

b) decreases; doesn’t change

c) decreases; decreases

d) increases; increases

Wrong! - Marginal utility per dollar is calculated as marginal utility divided by price. How does a rise in the price of gas change the price of a vacation further from home and a staycation, and how does this change the marginal utility per dollar for both types of vacation?

Good Job! - Marginal utility per dollar is calculated as marginal utility divided by price. Marginal utility isn’t influenced by changes in price. But the family buys gas for vacations further from home and for staycations, so a rise in the price of gas increases the price of both types of vacation. The family’s marginal utility per dollar from vacations further from home decreases and their marginal utility per dollar from staycations decreases.

2) The Adamson family are initially in consumer equilibrium, and then the price of gas rises. If the Adamsons are one of the many families described in the news clip, how does the Adamson family move to their new consumer equilibrium following the rise in gas prices?

The Adamson family ______________.

a) maximizes total utility by increasing staycation days, decreasing vacation days, and spending all their budget

b) increases staycation days and decreases vacation days, but no longer maximizes total utility

c) increases marginal utility per dollar from staycation days and decreases marginal utility per dollar from vacation days, and maximizes total utility

d) maximizes marginal utility from staycation days and minimizes marginal utility from vacation days, and spends all their budget

Wrong! - The Adamson family maximizes total utility by spending all their budget and setting the marginal utility per dollar equal for both types of vacation. But with the rise in the price of gas the marginal utility per dollar from vacations falls below the marginal utility from staycations. What action must they take to make the marginal utility per dollar the same for both vacation types?

Good Job! - The Adamson family maximizes total utility by spending all their budget and setting the marginal utility per dollar equal for both types of vacation. But the rise in the price of gas decreases the marginal utility per dollar from vacations by more than the marginal utility per dollar from staycations decreases. The Adamson family increases their staycation days and the marginal utility per dollar from staycation days decreases. They decrease their vacation days and the marginal utility per dollar from vacation days increases.

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