John is a well-known consultant who makes $150 an hour and has all the work he can handle. He has a big job in Washington D.C., ten hours away. He can drive at a cost of $80 round trip or take a one-hour flight for $300 . Which is he likely to do? Are there circumstances that may lead him to choose otherwise?

Answer 1

From an opportunity cost perspective, we would expect John to fly. The monetary costs of driving would be the $3,000 foregone - $150 20 hours) plus $80 . The cost to fly would be $150 - 2 hours plus $300 . (Time is doubled to account for the round trip.) From a purely monetary perspective, it would appear rational for John to fly. However, we know there are other considerations besides money. It may be that John hates to fly, and this aversion may lead him to drive. Preferences are sometimes more important than money. Another factor may be the marginal tax rate John faces. A high rate would greatly reduce the pecuniary incentives for driving.