Answer to Question #4976 in Microeconomics for Sally Brown

Question

How can I compare the benefits to the costs of planning a vacation when most of the costs of the vacation are measured in dollars but the benefits of the vacation are phsychological?

Answer 1

Here is one possible approach. If benefits cannot be expressed in monetary amounts, we use a theoretical unit of satisfaction, or utility. To make the comparison, let us convert the monetary quantity of the costs of a vacation into utility. Supposing we do not opt for a vacation, but will nevertheless incur the same costs, what substitute good or activity could the money be spent on? Supposing a substitute is a brand new car, we are now comparing two benefits with hypothetically the same cost. We now decide which one will maximize our satisfaction. If we value a vacation more than a new car, then we take a vacation. If we value the car more than the vacation, we don't take a vacation - but that doesn't mean we should buy the car because that is only a representation of the costs of the vacation.