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Answer to Question #4976 in Microeconomics for Sally Brown

Question #4976
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?
Expert's answer
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.

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