COST-BENEFIT ANALYSIS ECON CLASS

Reference - Boardman et al., Cost-benefit Analysis: Concepts and Practice. 4th Ed.

Exercise 2: Option Price What is option price? Explain why the option price of a policy might differ from the expected surplus generated by the policy. Exercise 3: Option Value Dene option value. Suppose that a public project is reducing the risk faced by farmers1 but the expected income of each farmer does not depend on whether the project is undertaken or not. Let farmer A be risk averse and farmer B be risk neutral. Compare their option values. Exercise 4: Option Price Calculation Imagine that we want to value a cultural festival from the point of view of a riskaverse person. The person's utility is given by UH} where $I is her ineome. She has a 50% chance of being able to get vacation time to attend the festival. If she gets the vacation time, then she would derive a surplus of $X when she attends the festival. [The festival is free and does not cost her anything to attend.) If she does not get vacation time, then she cannot attend the festival. (a) What is her expected surplus from the cultural festival? (b) Write an expression for her expected utility if she does not go to the festival. ((3) Show an expression that determines her option price