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
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.
categories of costs were related to obtaining and maintaining the facilities.
major category of benefit was reduced sailing time to patrol routes.
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?