Questions and Answers of Cost Benefit Analysis

You have been provided with the following information about three public sector projects with a breakdown of the Referent Group net benefits (unweighted) among the three Referent Group (RG)
The data in the table below show the breakdown of the Referent Group (RG) benefits for two projects (A and B), information about each sub-group’s income level and marginal propensity to save (mps).
A decision-maker believes that each member of the community derives utility from their income according to the following formula:U = αYβwhere U = annual level of utility Y = annual income levelα =
From the data in the table on the distribution of income (by quintile) between two states, A and B, you are required to compare the degree of income inequality between the two states using Lorenz
In both countries A and B two groups of income recipients are identified. Within each group income is evenly distributed, but the upper income group receives a disproportionate share of national
A risk-neutral decision-maker is considering making an irreversible investment costing $1200. The proposed project has no operating costs, and will produce 100 units of output per annum in
Nicole leads an exciting life. Her wealth is a risky prospect which will take the value$100 with probability 0.5, or $36 with probability 0.5. Her utility of wealth function is: U = W0.5.i What is
The following table describes the projected costs and net benefits for two projects (all values in $ millions.)Project A Project B Pessimistic Best Guess Optimistic Pessimistic Best Guess Optimistic
and 10 decibels respectively, and decreased noise levels in Areas C and D of 2 and 8 decibels respectively 1 An analyst has calculated the expected net present value in millions of dollars (Mean NPV)
Using the data provided in Example 8.4, calculate the net benefits of an alternative road proposal that results in increased noise levels in Areas A and B of
A contingent valuation study was used to value improvements to a coral reef, where, at present, the reef quality, measured in terms of percentage of reef cover, is so poor that the local residents
Individuals A and B have the same money income, have the same tastes and face the same set of prices of all goods and services except that of access to a National Park.Individual A lives further away
Manufacturers in an urban environment are currently producing 25,000 widgets per annum. Their gross revenue is $300 per widget and their variable costs are $125 per widget. Air quality in the city
Ellsworth spends all of his income on two goods, x and y. He always consumes the same quantity of x as he does of y, Qx = Qy. Ellsworth’s current weekly income is $150 and the price of x and the
When a public project results in lowering the price of a particular commodity(Commodity A), it impacts on the markets for complementary or substitute commodities. Give some examples of this type of
Comment critically on the following approaches to measuring project benefits:i An analyst measures the annual benefit of a bridge as the gain in consumer surplus to bridge users plus the increase in
The Happy Valley Water Control Board (HVWCB) will undertake an irrigation project which will provide 10 million gallons of water annually to 100 wheat farms of 100 acres each. The HVWCB will charge
i Briefly outline the model and principles you would use to conduct a cost-benefit analysis of a highway project which will reduce the travel time between two cities (include the appropriate diagram
A new publicly financed bridge is expected to reduce the cost of car travel between two areas by $1 per trip. This cost reduction to motorists consists of a reduction in travel time, car depreciation
For the ICP case study, prepare a summary table of net benefits (discounted at 8%)in the same format as Table 6.1. Hints: note that the NPV of direct tax receipts is 164.2 million Baht, the NPV of
A local contractor hires $5000 of unskilled labour at the minimum wage and constructs a children’s adventure playground, on otherwise vacant land, for which it is paid $7500 by the local council.
A foreign firm is considering a project which has, at market prices, a present value of benefits of $200 and a present value of input costs of $130. If the project goes ahead, tax with a present
The state government hires a computer programmer from another state for a month at a cost of $30,000, which is $10,000 more than she could earn during that period in her home state. The state
A local firm hires $150 of unskilled labour at the minimum wage and constructs a walking track, for which it is paid $180 by the state government. The firm incurs no other cost, apart from the wage
A foreign firm, which is not part of the Referent Group, proposes to establish a food processing plant in Australia (the Referent Group). With one exception, market prices measure all the efficiency
Suppose that a competitive economy’s labour supply consists of 100 units at the after tax wage of $3 per unit. The elasticity of labour supply is 0.25, and there is a flat-rate 40% tax on labour
In Figure 5.14 showing taxation and labour supply: S represents the aggregate supply curve of labour, W is the market wage, W0 is the after-tax wage before the tax increase, and W1 is the after-tax
Suppose that a $100 public project is to be financed by the sale of bonds to the public.Purchasers of the bonds increase savings by $80 and reduce private investment by $20.The only tax in the
For each of the 16 cases indicated in the table below state whether you would use the demand curve or the supply curve to determine the appropriate price for valuation purposes in an Efficiency
Suppose that the elasticity of demand for a monopolist’s product is 1.5. Calculate the ratio of the value of the marginal product of labour to the marginal revenue product of labour. What is the
A worker values her leisure time at $7 per hour. She is offered work on a public project at a wage of $22 per hour, but if she accepts she will forfeit unemployment benefits equivalent to $13 per
Suppose that the market wage is $100 per day and the value placed on the leisure time of unemployed labour is $60 per day. A project is expected to take 50 worker-days to complete. It is expected
A firm’s stock of working capital at the end of each year in the life of a project was as follows:Year 0 1 2 3 4 5 Working Capital ($) 0 50 75 70 30 20 Calculate the working capital cost stream
Suppose that a firm has borrowed $1000 in the current year at a 10% interest rate, with a commitment to repay the loan (principal and interest) in equal annual instalments over the following five
If a project involving an initial investment of $20 million is funded partly by debt(75%) and partly by equity capital (25%), and the internal rate of return on the overall cash flow of the project
The dam currently providing irrigation water to farmers in Happy Valley cost$100 million to build, and the valley currently produces 15 million kilos of sugar per annum which sells at the world price
A project’s net cash flow, valued at current prices, is given by:Year 0 1 2 3 4 5 Net Cash Flow ($): −1000 250 250 250 250 250 i The nominal or money rate of interest is 8% and the anticipated
Three different technologies are being considered for a project to provide a given service. Assume that the quantity and quality of the service are identical for the three options. Project A has a
A public decision-maker has a budget of $100 which must be spent in the current year.Three projects are proposed, each of which is indivisible (it is not possible to undertake less than the whole
A firm has a capital budget of $30,000 and is considering three possible independent projects. Project A has a present outlay of $12,000 and yields $4,281 per annum for 5 years. Project B has a
A firm has a capital budget of $100 which must be spent on one of two projects, with any unspent balance being placed in a bank deposit earning 15%. Project A involves a present outlay of $100 and
A firm has a capital budget of $100 which must be spent on one of two projects, each requiring a present outlay of $100. Project A yields a return of $120 after one year, whereas Project B yields
Consider the six potential public sector projects described below.
percentage point intervals) and for time periods 1 to 30 (at one time period intervals), as well as time periods 50 and 100. You should generate these tables by inserting the numbers for the time
Using a spreadsheet, generate your own set of Discount and Annuity Tables for, say, all discount rates between 1% and 20% (at
The following net cash flows (in $000s) relate to two projects:
Given the following information, use two different methods to calculate the present value of a ton of coal to be received one year from now:money rate of interest (m): 8% per annum expected rate of
A project requires an initial investment of $100,000 and an annual operating cost of $10,000. It will generate annual revenue of $30,000. If the life of the project is 10 years and the discount rate
A firm is considering a project which involves investing $100 now for a return of $112 a year from now. What are the values of the following variables?i the marginal productivity of the capital
Suppose that the economy consists of three individuals, A, B, and C, and that there are three projects being considered. The net benefits, measured in dollars, received by the three individuals from
A foreign firm is considering a project which has present values of benefits and costs, at market prices, of $100 and $60 respectively. If the project goes ahead, tax of $20 will be paid to the host
A recent high school graduate has been offered a job at the local supermarket paying$15,000 per year. She believes that if she were to graduate from college her annual earnings would be $6000 more
The casino has given you $100 worth of complementary chips which must be wagered this evening. There are two tables: roulette and blackjack. The expected value of $100 bet on roulette is $83, and the
Imagine that you wanted to use a life-course model similar to the Alzheimer's disease model to estimate the net benefits of helping someone quit smoking. What would be the most important similarities
What information would be needed to estimate the net benefits of a state-wide Alzheimer's disease screening program for 65 year olds?
What weaknesses do you see in this CBA? If corrected, would they increase or decrease the expected NPV?
Why is there no consumer surplus included as a benefit?
Would you describe this study as a Distributional CBA?
An overlook in the state’s Scenic Park offers a spectacular view of Angel’s Lake and the surrounding countryside. The overlook is accessible to people in wheelchairs by a special park bus that
Figure C4.1 shows the effect of adding 183.6 million dozen eggs to the cage free market assuming a price elasticity of supply of 0.5. Recalculate the equilibrium price and quantity and the change in
CBAs have been conducted of six proposed projects. None of these projects are mutually exclusive and the agency has a sufficient budget to fund those that will make society better off. The findings
You are a decision-maker who has to decide whether to adopt the Tulsa IDA program on a permanent basis relying, in part, on the information provided by the CBA described in this case study.The case
Assuming that the elasticity of the value of statistical life with respect to income is between 0.5 and 1.2 and that the value of statistical life in the United States is between $4 million and $13
How much would the shadow price of a diploma change if the probabilities of high school graduates obtaining no further education, some college, and college graduation were 26 percent, 38 percent, and
How would the shadow price of a high school diploma change if the labor force participation rate for increase?
Blomquist and his colleagues predict that willingness-to-pay for a 10 percent expansion of KCTCS would be around $92.7 million. Do you think that this is a reasonable estimate? Why or why not?
a. Why did Blomquist and his colleagues believe that contingent valuation was needed to fully assess the value of a 10 percent expansion of KCTCS?b. Did their findings suggest that they were correct?
A worker, who is typical in all respects, works for a wage of $50,000 per year in a perfectly safe occupation. Another typical worker does a job requiring exactly the same skills as the first worker,
Child care services in a small Midwestern city cost $30 per day per child. The high cost of these services is one reason why very few mothers who are on welfare work; given their low potential wages,
If you were running a state welfare agency and had to choose one of the programs listed in the table, what information would you like in addition to that provided in the table?
If you were running a state welfare agency and had to choose one of the programs listed in the table, which table’s columns would you particularly focus upon? Why?
Using the scheme shown in Table 14.1, diagram the evaluation design used in each of the following demonstration programs.To evaluate a government training program that provides low-income,
If we take the survey results at face value, then it would be reasonable to interpret the $8.5 million annual willingness to pay as the aggregate annual option price. If the costs of the unit were
The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $830 million. The annual net benefits will depend on the amount of rainfall: $36 million in a
Assume a project will result in benefits of $1.2 trillion in 500 years by avoiding an environmental disaster that otherwise would occur at that time.a. Compute the present value of these benefits
The following table gives cost and benefit estimates in real dollars for dredging a navigable channel from an inland port to the open sea.The channel would be navigable for seven years, after which
A government data processing center has been plagued in recent years by complaints from employees of back pain. Consultants have estimated that upgrading office furniture at a net cost of $430,000
A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge. The temporary bridge can be put up in a few weeks
a. Imagine Washington State is considering implementing a program that pays monetary awards to families when their high school age children meet certain goals (for example, school attendance,
Consider an individual€™s utility function over two goods, qmand qs, where m indicates the primary market in which a policy will have its effect and s is a related secondary
Recall exercise 2 from Chapter 5 in which a country imposes an import fee on the crude oil it imports. Imagine that all the crude oil imports to the country are made by ships owned by its nationals.
Recall exercise 2 from Chapter 5 in which a country imposes an import fee on the crude oil it imports. Assume that prior to the imposition of the import fee, the country annually consumed 900 million
Recall exercise 1 from Chapter 5 in which an increase in the toll on a highway from $.40 to $.50 would reduce use of the highway by 5,000 cars per week.a. Because of the reduced use of the
Consider the example presented in Figure 4.3. Compute the annual loss in consumer surplus for the price increase from $1.25 to $1.75.a. Assume a linear demand curve as per equation (4.7)b. Assume a
A person’s demand for gizmos is given by the following equation:q = 6 – 0.5p + 0.0002Iwhere,q is the quantity demanded at price p when the person’s income is I. Assume initially that the
Because of a recent wave of jewellery store robberies, a city increases police surveillance of jewellery stores. The increased surveillance costs the city an extra $500,000 per year, but as a result,
Three mutually exclusive projects are being considered for a remote river valley: Project R, a recreational facility, has estimated benefits of $20 million and costs of $16 million; project F, a
The effects of a tariff on imported kumquats can be divided into the following categories: tariff revenues received by the treasury ($8 million); increased use of resources to produce more kumquats