CAFE (Corporate Average Fuel Economy) standards require that the average fuel economy of all the cars that
Question:
CAFE (Corporate Average Fuel Economy) standards require that the average fuel economy of all the cars that a car manufacturer sells must meet a certain target of 30 miles per gallon (mpg) or the manufacturer must pay a penalty. CAFE standards were imposed after the oil crises in the 1970s to reduce US dependence on foreign oil. The imposition of CAFE standards has been accompanied by a rise in average fuel economy cars. Most fuel-efficient cars give less protection in a car accidents because they are made of less strong, lightweight materials. However, they reduce gas usage and pollution. Question: Should the US raise CAFE standards to 35 mpg?
Program Input:
In order to evaluate the economic merits of CAFE standards of 35 mpg, the following data was collected by your research team:
- On-time Research & Development R&D cost and other initial investment expenditures are estimated to be $500 Million (M), with half of that amount occurring during the first year and the other half over the second year.
- New cars will cost $100 more, and that there will be 10M cars sold per year.
- It is expected that there would be 100 more fatalities per year in traffic accidents. Life is valued at $3M on average.
- Individuals will use $10 less in gas/year. Assume there are 100M cars in the US and that all cars get the same savings of $10 every year.
- The new CAFE standards is expected to reduce pollution of the environment, which is valued at $225M/year.
- It is also expected that the military budget will be reduced by $100M/year because the US will conduct less military actions in the Persian Gulf.
- Assume that all future payments, benefits or costs, other than the cost of R&D and the initial investment expenditures, will occur in perpetuity, starting in year 3.
- You are required to evaluate this program using a social discount rate (r) of 10%.
Required work:
- Clearly categorize the input above into the program’s costs and benefits. Then, compute Net Present Discounted Value (i.e., PDV of social net marginal benefit) of the program.
- Based on your results in (A), should the program be accepted or rejected? Why?
- Suppose that the city of Buffalo added a new subway station in a neighborhood between two existing stations. After the station was built, the average house price increased by $10,000 and the average commute time fell by 15 minutes per day. Suppose that there is one commuter per household, that the average commuter works 5 days a week, 50 weeks a year, and that the benefits of reduced commuting time apply to current and future residents forever. Assume an social discount rate of 5%. Produce an estimate of the average value of time for commuters, based on this information.
College Algebra Graphs and Models
ISBN: 978-0321845405
5th edition
Authors: Marvin L. Bittinger, Judith A. Beecher, David J. Ellenbogen, Judith A. Penna