Cost-Benefit Analysis, Assignment 2 - Fall 2017 - Solutions.pdf

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Cost-Benefit Analysis Fall 2017 Assignment #2 1 Johns Hopkins University: Applied Economics Cost-Benefit Analysis (440.632, Fall 2017) Assignment #2 This assignment worth 125 points and is due by 11:59 pm on November 6 8 , 2017. You may discuss the assignment and way in which it can be solved with your classmates, but you must do your own work. Ultimately it is an individual assignment . All calculations and written narrative should be your own. Washington State Ferries (WSF) operates the largest ferry system in the United States and the fourth- largest ferry system in the world. It maintains a fleet of 22 ships in its fleet, runs 10 routes serving 20 terminals, and employees over 1,800 individuals. Over the last ten years, WSF has retired 11 ships from service and added seven ships. Four of the 144-car ferries built in 1967 are reaching the end of their 60- year service life and WSF predicts that replacements will be needed by 2027 to maintain the current level of service. Currently, Washington State law imposes a number of restrictions on the bidders including the requirement that new ferries be constructed in state and that shipyards have an apprenticeship program approved by the State Regulatory Apprenticeship Council. There are concerns that these requirements restrict competition and raises the cost of ferry construction. Over the last 30 years, the state has received only one or two bids on all new ferries constructed and a report by the State Auditor’s Office indicates that ferries purchased by WSF are statistically more expensive than other ferries. For this assignment, you will conduct a program evaluation of the WSF requirements for ferry acquisitions. Program evaluations are studies that assess how well a program is achieving its intended goals, and there are three types of program evaluations: process evaluations, impact evaluations, and cost-benefit evaluations. Process evaluations examine the efficiency and effectiveness of a program implementation or program structure. For example, a process evaluation might measure the speed of the contracting process or constituent satisfaction with the WSF requirements. Impact evaluations provide evidence that outcomes have occurred and estimate the proportion of outcomes that are attributable to the program rather than to other influences. For example, an impact evaluation might estimate the number of ferries that would have been built in-state without the WSF requirement. A cost-benefit analysis calculates the quantitative economic benefits and costs of a program and compares the value of the benefits to the costs incurred to achieve those benefits. You will conduct a benefit-cost analysis of eliminating the WSF requirements for the acquisition of a new 144-car ferry beginning in 2021.
Cost-Benefit Analysis Fall 2017 Assignment #2 2 1. ( 25 points) Estimate the benefits of removing the WSF acquisition requirements for a 144-car ferry to be built in 2021 a. (5 points) Ship inflation rate, g: Historically, the cost of ship construction has increased faster than prices in general. The Bureau of Labor Statistics (BLS) produces two price indices for the

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