1. Award: 10.

00 points

Cost-benefit analysis is

 used by only the private sector to determine whether certain projects should be
undertaken.

 impossible since benefits and costs are hard to evaluate.

 a set of practical procedures for guiding public expenditure decisions.

 all of these answer options are correct.

References

Multiple Choice Difficulty: Easy

2. Award: 10.00 points

The rate at which future money must be discounted is known as the

 rate of inflation.

 exposure rate.

 discount rate.

 time rate.

References

Multiple Choice Difficulty: Easy

3. Award: 10.00 points

The value of a human life

 can be estimated by lost earnings.

 can be estimated using probability of death.

 is an intangible that is hard to value.

 all of these answer options are correct.

References

Multiple Choice Difficulty: Easy

4. Award: 10.00 points

The value that society places on consumption that is sacrificed in the present is called

 social marginal costs.

 social marginal damages.

 social rate of discount.

 social returns.

References

Multiple Choice Difficulty: Easy

5. Award: 10.00 points

Risk is _________ a part of cost-benefit analysis.

 never

 always

 unable to be calculated as

 decided by others whether to be

References

Multiple Choice Difficulty: Easy

6. Award: 10.00 points

Money values indexed to a given period are known as

 nominal.

 real.

 inverse.

 random.

References

Multiple Choice Difficulty: Easy

7. Award: 10.00 points

The term "future value"

 can be determined by inverting the formula for present value.

 is not used in modern public finance analysis.

 refers to the present value of future money.

 includes the shadow prices of all goods used in a project.

References

Multiple Choice Difficulty: Moderate

8. Award: 10.00 points

For certain intangibles that cannot be measured, it is best to

 guess.

 exclude them from cost benefit analysis, and then calculate how large they must be to
reverse the decision.

 reevaluate using the Hicks-Kaldor criterion.

 leave it to the private sector to decide on value.

References

Multiple Choice Difficulty: Moderate

9. Award: 10.00 points

The chain-reaction game

 was cancelled on network TV.

 counts secondary benefits without counting secondary loses.

 compounds a bad decision by making more bad decisions, causing unwanted projects to
get funded.

 counts secondary costs without counting secondary benefits.

References

Multiple Choice Difficulty: Easy

10. Award: 10.00 points

For a government to be efficient, a project should be funded

 only when the marginal benefit exceeds the marginal cost.

 only when the marginal cost exceeds the marginal benefit.

 until the marginal benefit equals the marginal cost.

 as long as the marginal cost exceeds the marginal benefit.

References

Multiple Choice Difficulty: Moderate

11. Award: 10.00 points

As long as net returns are positive, the gainers could compensate the losers and still enjoy a net
increase in utility. This notion is called

 a potential Pareto improvement.

 the Hicks-Kaldor criterion.

 both of these answers are correct.

 neither of these answers is correct.

References

Multiple Choice Difficulty: Easy

12. Award: 10.00 points

Inflation favours

 lenders.

 borrowers.

 neither borrowers nor lenders.

 both borrowers and lenders.

References

Multiple Choice Difficulty: Moderate

13. Award: 10.00 points

Evaluating of costs and benefits is likely to require

 a PhD in economics.

 ad hoc assumptions.

 only economists as they possess all the technical expertise required.

 only observed prices.

References

Multiple Choice Difficulty: Moderate

14. Award: 10.00 points

When wages are viewed as benefits instead of costs of a project, it is an example of the

 labour game.

 chain-reaction game.

 double-counting game.

 dating game.

References

Multiple Choice Difficulty: Easy

15. Award: 10.00 points

Internal rate of return analysis suggests that a project should be undertaken if

 NPV > 0.

 MB > 0.

 IRR > discount rate.

 discount rate > inflation rate.

References

Multiple Choice Difficulty: Easy

16. Award: 10.00 points

Real dollar amounts are essentially the same as nominal dollar amounts.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

17. Award: 10.00 points

When the benefit-cost ratio of a project is greater than 1, the project should be considered.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

18. Award: 10.00 points

The term "present value" refers to the future value of present day money.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

19. Award: 10.00 points

When the benefits or costs of a project are risky, they must be avoided.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

20. Award: 10.00 points

Refer to the figure below. If the supply curve returns to its initial level of Sa, the amount of consumer
surplus will return to its original level.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Moderate

21. Award: 10.00 points

Using the present value criterion is more reliable than using the internal rate of return and the
benefit-cost ratio.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

22. Award: 10.00 points

A social rate of discount measures the value society places on consumption that is sacrificed in the
future.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

23. Award: 10.00 points

The systematic study of the costs of the various alternatives should be done to find the cheapest
way possible is sometimes called cost-effectiveness analysis.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

24. Award: 10.00 points

The shadow price of goods traded in imperfect markets is the underlying social marginal cost.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

25. Award: 10.00 points

Counting as benefits of the project the sum of the increase in land value and the present value of
net income from farming it is an example of the chain-reaction game.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

26. Award: 10.00 points

In the private sector, if the net return is positive it should be undertaken regardless of who gains
and loses.

 True

 False

 Uncertain

References

Multiple Choice Difficulty: Easy

27. Award: 10.00 points

The government has hired you to advise them on the merits of a project that is being proposed.
The project is expected to generate benefits of 14 million dollars today, 5 million dollars in one year
from today, and 1 million dollars in two years from today. (These are the only years of concern.) The
project costs nothing today, but will cost 20 million dollars in two years. Assume the interest rate is
10%. If the benefit-cost ratio is greater than 1, the project should be allowed. What is your policy
suggestion?

Benefit stream is 14M + 5M/1.11 + 1M/1.12 = 19371900.826. Cost stream is 20M/1.12 = 16528925.62.
Therefore, B/C = 19371900.826/16528925.62 >1. Project should be funded.

References

Short Answer Difficulty: Difficult

28. Award: 10.00 points

If the interest rate is 5 percent, what is the present value of $5,000 five years from now?

PV = 5,000/(1.05)5 = 3,917.63

References

Short Answer Difficulty: Difficult

29. Award: 10.00 points

What is the interest rate that should be used to ensure a total balance of $3,000 two years from
now if you have a starting balance of $2,000?

The rate should be 22.4744%.

References

Short Answer Difficulty: Difficult

30. Award: 10.00 points

Refer to the figure below. If the demand curve can be characterized by the equation Q = 10 - P, how
much of an increase in consumer surplus will occur when the price of avocados falls from $2.89 to
$1.35?

The original consumer surplus with 2.89 price is (1/2) * (7.11) * (7.11) = 25.28. The new consumer
surplus with 1.35 price is (1/2) * (8.65) * (8.65) = 37.41. Consumer surplus increases by 37.41 - 25.28 =
12.13.

References

Short Answer Difficulty: Difficult

31. Award: 10.00 points

Suppose in a certain city the demand for low-cost housing can be characterized by the equation P =
500 - 2Q, where Q is housing measured in square feet. Further, suppose that supply is
characterized by the equation: P = 25 + 3Q.

(A) How much consumer surplus is there?

(B) Suppose that a grant is given so that the supply of housing is increased. This increase changes
the supply curve to P = 3Q. How much does consumer surplus change because of the grant?

(A) Setting supply equal to demand gives Q* = 95 and P* = 310. Therefore, consumer surplus is (1/2)
(95)(190) = 9,025.
(B) Setting the new supply curve equal to the original demand curve gives Q* = 100 with P* = 300.
Now consumer surplus is (1/2)(100)(200) = 10,000.

References

Short Answer Difficulty: Difficult

32. Award: 10.00 points

Consider two projects. The first project pays benefits of $90 today and nothing else. The second
project pays nothing today, nothing one year from now, but $100 two years from now. Which project
would be preferred if the discount rate were 0%? What if the rate increased to 10%?

For a discount rate of 0%, the present value calculations would be $90 for project one and $100 for
project two; therefore, project two is preferred. At a rate of 10%, the PV of project one is still $90.
For project two, the PV is now 82.6; therefore, project one is preferred.

References

Short Answer Difficulty: Difficult

33. Award: 10.00 points

Some analysts have argued that cost-benefit analysis does not take into account issues involving
equity and is nothing more than an efficiency test. Do you agree with this statement?

The use of cost analysis can be designed to handle issues of equity. Generally, these inputs need to
be included in the model by making some assumptions about welfare gains and losses. A potential
hazard of introducing distributional considerations is that political concerns may come to dominate
the cost-benefit exercise.

References

Short Answer Difficulty: Difficult

34. Award: 10.00 points

Compare the following methods to evaluate a project: present value criterion, internal rate of return,
and benefit-cost ratio. Which is preferred? Why?

The IRR method and the benefit-cost ratio are consistent with the present value criterion for
evaluating project admissibility, but are not adequate for comparing admissible projects. The
present value criterion is superior to the other two methods.

References

Short Answer Difficulty: Difficult

35. Award: 10.00 points

Why is it that projects that should not be undertaken are sometimes undertaken?

Sometimes the influence of special interests or other factors clouds the judgment of decision
makers. Often the case arises where the analysis was a victim of faulty calculations of inputs or
outputs. For example, there might be double counting or other problems.

References

Short Answer Difficulty: Difficult