Chapter_08_v2

# Chapter_08_v2 - Part 2 Public Expenditure: Public Goods and...

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Part 2 – Public Expenditure: Public Goods and Externalities Chapter 8 – Cost-Benefit Analysis 1. Yes, one really must ask these questions, although it may seem distasteful. Otherwise, there is no way to determine which safety precautions are sensible. 2. The increased time spent at the inspection must be counted as a cost of the program. One reasonable way to estimate the value of the time would be to use the average wage rate in the state, and multiply this by the incremental waiting time of 105 minutes. 3. The present value of \$25/.10 = \$250. The present value of the perpetual annual benefit = B + B/(1 + r) + B/(1 + r) 2 + … = B (r + 1 - r)/r = B/r. 4. a. The internal rate of return is the discount rate that would make the project’s net present value (NPV) equal zero. To solve for the internal rate of return, ρ , set the present value of benefits minus the present value of costs equal to zero. If we assume the benefit of using the bicycle is immediate (and worth \$170), there is

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## This document was uploaded on 02/14/2012.

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Chapter_08_v2 - Part 2 Public Expenditure: Public Goods and...

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