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Chapter Exercises

# Chapter Exercises - Chapter 2 Exercises 4 Three mutually...

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Chapter 2 Exercises 4. Three mutually exclusive projects are being considered for a remote river valley: Project R, a recreational facility, has estimated benefits of \$10 million and costs of \$8 million; project F, a forest preserve with some recreational facilities, has estimated benefits of \$13 million and costs of \$10 million; project W, a wilderness area with restricted public access, has estimated benefits of \$5 million and costs of \$1 million. In addition, a road could be built for a cost of \$4 million that would increase the benefits of project R by \$8 million, increase the benefits of project F by \$5 million, and reduce the benefits of project W by \$1 million. Even in the absence of any of the other projects, the road has estimated benefits of \$2 million. a. Calculate the benefit-cost ratio and net benefits for each possible alternative to the status quo. Note that there are seven possible alternatives to the status quo: R, F, and W, both with and without the road, and the road alone. b. If only one of the seven alternatives can be selected, which should be selected according to the CBA decision rule? 5. An analyst for the U.S. Navy was asked to evaluate alternatives for forward- basing a destroyer flotilla. He decided to do the evaluation as a CBA. The major categories of costs were related to obtaining and maintaining the facilities. The major category of benefit was reduced sailing time to patrol routes. The analyst recommended the forward base with the largest net benefits. The admiral, his client, rejected the recommendation because the CBA did not include the risks to the forward bases from surprise attack and the risks of being unexpectedly ejected from the bases because of changes in political regimes of the host countries. Was the analyst’s work wasted? 6. Because of a recent wave of jewellery store robberies, a city increases police surveillance of jewellery stores. The increased surveillance costs the city an extra \$500,000 per year, but as a result, the amount of jewellery that is stolen falls. Specifically, without the increase in surveillance, jewellery with a retail value of \$1 million would have been stolen. This stolen jewellery would have been fenced by the jewellery thieves for \$600,000. What is the net social benefit resulting from the police surveillance program? 1

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Chapter 3 Exercises 1. A person’s demand for gizmos is given by the following equation: q = 6 - 0.5 p + 0.0002 I where q is the quantity demanded at price p when the person’s income is I . Assume initially that the person’s income is \$40,000. a. At what price will demand fall to zero? (This is sometimes called the choke price because it is the price that chokes off demand.) b. If the market price for gizmos is \$10, how many will be demanded? c. At a price of \$10, what is the price elasticity of demand for gizmos?
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