This document discusses whether driving or flying would be more cost effective for a trip from Boston to Miami Beach. It outlines that a cost-benefit analysis should consider all costs and benefits, including monetary costs as well as the opportunity cost of time, and translate them into a common unit of measurement. When the analysis factors in the $100 cost savings of driving but also the 40 extra hours of driving time valued at $10 per hour, the net benefit of flying is calculated to be $300 more than driving. Therefore, an optimizer would choose to fly based on this cost-benefit analysis.
This document discusses whether driving or flying would be more cost effective for a trip from Boston to Miami Beach. It outlines that a cost-benefit analysis should consider all costs and benefits, including monetary costs as well as the opportunity cost of time, and translate them into a common unit of measurement. When the analysis factors in the $100 cost savings of driving but also the 40 extra hours of driving time valued at $10 per hour, the net benefit of flying is calculated to be $300 more than driving. Therefore, an optimizer would choose to fly based on this cost-benefit analysis.
This document discusses whether driving or flying would be more cost effective for a trip from Boston to Miami Beach. It outlines that a cost-benefit analysis should consider all costs and benefits, including monetary costs as well as the opportunity cost of time, and translate them into a common unit of measurement. When the analysis factors in the $100 cost savings of driving but also the 40 extra hours of driving time valued at $10 per hour, the net benefit of flying is calculated to be $300 more than driving. Therefore, an optimizer would choose to fly based on this cost-benefit analysis.
This document discusses whether driving or flying would be more cost effective for a trip from Boston to Miami Beach. It outlines that a cost-benefit analysis should consider all costs and benefits, including monetary costs as well as the opportunity cost of time, and translate them into a common unit of measurement. When the analysis factors in the $100 cost savings of driving but also the 40 extra hours of driving time valued at $10 per hour, the net benefit of flying is calculated to be $300 more than driving. Therefore, an optimizer would choose to fly based on this cost-benefit analysis.
To see these ideas in action, suppose that you and a friend are going to Miami Beach
from Boston for spring break. The only question is whether you should drive or fly. Your 1.1 friend argues that you should drive because splitting the cost of a rental car and gas “will only cost $200 each.” He tries to seal the deal by pointing out “that’s much better than a $300 plane ticket.” 1.2 To analyze this problem using cost-benefit analysis, you need to list all of the costs and benefits of driving relative to the alternative of flying. You then need to translate those costs and benefits into a common unit of measurement. 1.3 From a benefit perspective, driving saves you $100—the difference between driving expenses of $200 and a plane ticket of $300. From a cost perspective, driving costs you an extra 40 hours of time—the difference between 50 hours of round-trip driving time and about 10 hours of round-trip airport/flying time. Spending 40 extra hours traveling is a cost 1.4 of driving. But we still don’t know whether driving is a good idea or a bad idea, because we haven’t yet expressed everything in common units. Suppose the opportunity cost of 1.5 your time is $10 per hour (slightly below the median wage for U.S. workers between ages 16 and 24). This is the value of your time. Then the net benefit of driving relative to flying is 1.6 ($100 Cost saving) − (40 Hours of additional travel time) × ($10/hour) = $100 − $400 = −$300.
Hence, the net benefit of driving is overwhelmingly negative. An optimizer would choose to fly. Your decision about travel to Miami is a simple example of cost-benefit analysis, which is a great tool for collapsing all sorts of things down to a net dollar benefit. This book will guide you in making such calculations. If you are making choices as to which house to buy, which job to take, or whether Medicare should pay for heart transplants, cost-benefit analysis can help. Economists are not popular for making some of these “cold-hearted” calculations, but it’s nonetheless useful to be able to quantitatively ana- lyze difficult decisions. To an economist, cost-benefit analysis and optimization are the same thing. When you pick the option with the greatest net benefits—benefits minus costs—you are optimizing. So cost-benefit analysis is useful for normative economic analysis. It enables an economist to determine what an individual or a society should do. Cost-benefit analysis also yields many useful positive economic insights. In most cases, cost-benefit analysis correctly pre- dicts the choices made by actual consumers.
Evidence-Based Economics
Q: Is Facebook free?
W e can now turn to the question we posed at the beginning of the chap- ter. By now you know that Facebook has an opportunity cost—the best alternative use of your time. We will now estimate this cost. To do this, we’re going to need some data. Whenever you see a section in this textbook titled “Evidence-Based Economics,” you’ll know that we are using data to analyze an economic question. In 2013, Web users worldwide spent 250 million hours on Facebook each day. On a per person basis, each of the nearly 1 billion Facebook users allocated an average of 15 minutes per day to the site. College students used Facebook more intensively. The average college student spent about an hour per day on Facebook.
42 Chapter 1 | The Principles and Practice of Economics
