________ is the ratio of benefits to costs.

Question 1

2 / 2 pts

1. Cost-Benefit Analysis (CBA)is a policy assessment method that quantifies the value of policy consequences in monetary terms to some members of society.

False

Question 2

2 / 2 pts

2. Compared to ex ante CBA, ex post CBA is more useful for making resource allocation decisions.

False

Question 3

2 / 2 pts

3. The use of NPV criterion leads to a more efficient outcome and not necessarily the most efficient outcome.

True

Question 4

2 / 2 pts

4. Consumer surplus is important in CBA because changes in consumer surplus can be viewed as close approximations of the willingness-to-pay for a policy change.

True

Question 5

2 / 2 pts

5. When the price of a good increases, consumers buys less and when the price of a good decreases, consumers by more. Therefore, the demand curve is upward sloping.

False

Question 6

2 / 2 pts

6. The area under the demand curve and above the market price is called producer surplus which measures net benefits to sellers.

False

Question 7

2 / 2 pts

7. The Kaldor-Hicks criterion indicates that a policy of program should only be adopted if each member of the society will gain.

False

Question 8

5 / 5 pts

8. (5 points) In making a decision about a proposed policy change, what major advantage does “pure” cost-benefit analysis offer over qualitative cost-benefit analysis? Given this advantage, why might qualitative cost-benefit analysis be used instead of “pure” cost-benefit analysis?

Your Answer:

The major advantage of pure cost-benefit analysis is that it is a simple method of evaluation and helps to arrive at a decision more quickly based on quantitative data. Whereas qualitative analysis involves a more detailed approach that can be time-consuming if the data is not easily measurable.

It is good to look at both the qualitative and quantitative aspects for complex decisions or problems. For example, qualitative analysis might involve data regarding how a customer perceives your product for which you might take feedback from customers. It can also involve factors like reputation, brand strength, employee morale, etc. which have a bearing on the decision-making process. This isn't information that can be expressed in numerical terms. Hence results of qualitative analysis tend to be

The results of qualitative analysis tend to be more ambiguous but may give additional information or inputs in decision-making process whereas pure cost benefit analysis results are more decisive. Hence while solving complex problems qualitative analysis can be critical to capture some of that more ambiguous, but still critical information.

Question 9

10 / 13 pts

9. The following table, in which all figures are in million dollars, summarizes the result of recent cost-benefit analyses of five government projects:

Project

Social Benefits

Social Costs

Net Social Benefits

Benefit-Cost Ratio

A

$150

$120

B

135

112

C

260

130

D

110

40

E

210

110

a. (5 points) Fill in the two right-hand columns of the table above. Compute the net gains (net social benefits) and the benefit-cost ratio for each project.

b. (3 points) If the government wanted to maximize social welfare, which one of the projects listed above should be undertaken? Briefly explain.

c. (2 points) What does the benefit-cost ratio indicate?

d. (3 points) If the government’s budget was constrained to $120 million, which project should it choose to maximize social welfare? (Assume that social costs and the government’s budgetary costs are equal).

Your Answer:

a.

Project

Social Benefits

Social Costs

Net Social Costs

Benefit Cost Ratio

A

150

120

30

1.25

B

135

112

23

1.20

C

260

130

130

2

D

110

40

70

2.75

E

210

110

100

1.91

b. Project C should be selected because it has a high net social benefit.

c. The benefit-cost ratio indicates the percentage of benefit you will get from the cost.

d. Project D should be selected because it has a high net social benefit ratio.

Question 10

11 / 15 pts

10. A county is considering building a composting facility to reduce food waste. Analysts have estimated the present values of the following over the expected useful life of the facility:

Composting Facility

Monetized Effect

Social CBA

Social CBA

Guardian

Category

(million dollars)

National Standing

County Standing

County Standing

Federal grant

2.0

Construction costs

2.5

Food waste collection containers and personnel (facility operators, food waste/ garbage collectors,

3.0

Collection fees from county residents

6.5

Facility operation and maintenance costs

2.2

Use value to county residents

10

Use value to non-residents

3.1

Salvage/ Scrap value

0.3

Net Benefits (million dollars)

The federal grant is only available for this purpose. Construction, maintenance, and personnel costs will be done by a firm in the county.

a. (5 points) Assuming national-level standing, classify each item as benefit or cost and then calculate the social net benefits of the project.

b. (5 points) Assuming county-level standing, classify each item as benefit or cost and then calculate the social net benefits of the project.

c. (5 points) Assuming county-level guardian standing, classify each item as benefit or cost and then calculate the social net benefits of the project.

Your Answer:

a. National Level Standing

Category

Benefits (in millions)

Use Value to County Residents

10

Use Value to non-residents

3.1

Total

13.1

Category

Cost (in Millions)

Federal Grant

2

Total

2

Social net benefits = Total benefits - cost

13.1 - 2 = 11.1

b. County Level Standing

CATEGORY

Benefits (millions)

Federal Grant

2

Collection Fees from county residents

6.5

Use Value to county residents

10

Use Value to Non-residents

3.1

Salvage/scrap value

0.3

Total

21.9

Category

Cost (millions)

Construction Costs

2.5

Facility Operation and maintenance costs

2.2

Food waste collection containers and personnel

3

Total

7.7

Social net benefit = 21.9 - 7.7 = 14.2

C. County Level Guardian standing

Category

Benefits (millions)

Federal grant

2

Use value to county residents

10

Use value to non-residents

3.1

total

15.1

Category

Cost (millions)

Construction Costs

2.5

Facility Operation and maintenance costs

2.2

Food waste collection containers and personnel

3

Total

7.7

Social Net Benefits= 15.1 - 7.7 - 7.4

Question 11

17 / 17 pts

11. Show your solutions/ calculations for each question (not just the final answer).

Daisy’s demand for good X is given by the following equation:

q = 8 – 2p + 0.0007I

where q is the quantity demanded at price p when Daisy’s income is I. Daisy’s income is currently $90,000.

a. (3 points) At what price will Daisy’s demand fall to zero?

b. (3 points) If the price of good X is $12, how many will be demanded by Daisy?

c. (3 points) At a price of $12, calculate Daisy’s price elasticity of demand for good X.

d. (5 points) In a scratch paper, draw a diagram showing the demand curve for good X and shade the consumer surplus region at a price of $12. Calculate consumer surplus. You do not need to submit your drawing.

e. (3 points) If the price of good X decreases to $10, how much consumer surplus is gained?

Your Answer:

Q= 8-2P + 0.0007I I = $90,000

a. In order to find the price that Daisy's demand will fall to zero, I set Q = 0 to solve for P.

0 = 8 - 2P +0.0007 * 90,000

2P = 8 + 63

2P = 71

P = $35.50

b. If the price of a good = $12

Q = 8 - 2 * 12 + 0.0007 * 90,000

Q = 8 - 24 + 63

Q = 47 units of good X will be demanded

c. Elasticity = -2(12/47)

Elasticity = -0.51

d. The consumer surplus is the area of the triangle bounded by the area above the price and below the demand curve. Area of a triangle = 1/2 * Base * Height

Consumer Surplus = .5(47-0) * (35.5 - 12)

= .5 * 47 * 23.5

Consumer Surplus = 552.25

E. If the price increases to $10...

Q = 8 - 2(10) + 0.0007 * 90,000

Q = 8-20+63

Q = 51

Consumer Surplus = .5(51-0) 8 (35.5-10)

= .5 * 51 * 25.5

Consumer Surplus = 650.25

Gain in Consumer Surplus = 650.25 - 552.25 = $98

Question 12

14 / 16 pts

12. Go to CANVAS under 'Files' and open the pdf document "Demand and Supply". Use the linear demand and supply curves shown in the figure to answer the following questions:

a. (3 points) The economic value of the 5,000th unit is $_________, and the minimum price producer will accept to produce this unit is$___________

b. (3 points) When 5,000 units are produced and consumed, total consumer surplus is $ ________, and total producer surplus is $ _________. Show your work/ calculations.

c. (4 points) The net gain to society when 5,000 units are produced and consumed at the market price is $ __________, which is called ____________________________.

d. (4 points) In market equilibrium, total consumer surplus is $ _________________, and the total producer surplus is $ ___________________. Show your work/ calculations.

e. (2 points) The net gain to society created by this market is $ ___________________.

Your Answer:

a. The economic value of the 5,000th unit is $23, and the minimum price producers will accept to produce this unit is $13.

b. When 5,000 units are produced and consumed, total consumer surplus is $ 60,000, and total producer surplus is $ 22,500

Consumer Surplus = .5 * 5000 * (27 - 23) + 5000 * (23-13) = 60,000

Producer Surplus = .5 * 5,000 x (13-4) = 22,500

c. The net gain to society when 5,000 units are produced and consumed at the market price is $ 82,500, which is called Social Surplus

d. In market equilibrium, total consumer surplus is $35,000, and the total producer surplus is $80,000. Show your work/ calculations.

Consumer = .5 * 10000 * (27-20) = 35,000

Producer = .5 * 10,000 * (20 - 4) = 80,000

e. The net gain to society created by this market is $115,000.

Question 13

5 / 5 pts

13. (5 points) Explain why budgets and expenditure statements are inadequate in cost analysis.

Your Answer:

Budgets don’t include the cost information for all ingredients that are used in an intervention. When resources are already purchased or are included in another agency’s budget, they are not discernible. Standard budget practices can distort the true costs of an ingredient. Many times, budgets and expenditure statements charge the costs of major rehabilitation only to the year in which the cost was incurred. The costs of any particular intervention are often embedded in a budget or expenditure statement that covers a much larger unit of operation. Most budgetary documents represent a plan for how resources will be allocated rather than classifying expenditures after they have taken place.

Question 14

4 / 4 pts

14. (4 points) Describe what a perfectly competitive market is.

Your Answer:

Perfectly competitive markets are characterized by an abundance of buyers and sellers, undifferentiated products, no barriers to entry and exit, and perfect information about the price of goods.

Question 15

8 / 11 pts

15. Consider a facility that has a 30-year life, a replacement cost of $2 million, and an interest rate of 5%.

a. (4 points) Calculate the annualization factor. Show your work/ calculations using the formula.

b. (3 points) Based on the annualization factor, calculate the annual cost of the facility.

c. (4 points) To implement the project, a new equipment is purchased at $15,000 which has a useful life of 10 years. Using the annualization factor at 4% interest rate, what is the equipment’s annual depreciation cost?

Your Answer:

a. Annualization Factor = (1/r)*(1-1/(1+r)^n)

(1/0.05)*(1-1/(1=0.05)^30) = 15.372

b. Annual cost of the facility = $2,000,000/15.372 = $130,106.69

c. Annualization 4% at 10 years = (1/0.04)*(1-1/(1+0.04)^10)=8.111

Annual equipment depreciation cost = 15,000/8.111 = $1,849.4

Quiz Score: 88 out of 100