Economics 454
Spring 2016
Answers to Sixth Problem Set
I.
Suppose that a business owner is considering a possible investment. If state of
the world 1 (SOW1) occurs, the net benefit will be $50,000, but if SOW2 occurs it
will be $40,000. The two states are
Economics 454
Spring 2016
Answers to First Problem Set
I.
Consider a society with three consumers, Smith, Jones, and Brown. The Social Marginal
Utility of Income (SMUY) is 1.1 for Smith, 0.6 for Jones, and 0.5 for Brown.
A. Assuming that all three individ
6.1
ECON 454 AU17
Lecture 6
Present value of consumption criterion, review
Capital markets and dynamic efficiency
Net present value formula
Accounting for inflation
Net present value decision rules
Numerical example
Continuous discounting
Special cases of
2.1
ECON 454 SP17
Lecture 2
Social welfare criterion, continued
Pareto criterion
Potential compensation criterion
Summary
Aggregation over commodities
Valuation principles
Social welfare criterion
As discussed in Lecture 1, the social welfare criterion ca
ECON 454 SP17
1.1
Lecture 1
Introduction
Benefit-cost analysis as four-way aggregation
Standing
Social welfare
Introduction
Page 1 of the syllabus reviews the course requirements. There will be two noncumulative exams and eight problem sets. The exams wil
5.1
ECON 454 SP17
Lecture 5
Aggregation over Time
Basic principles
Rate of time preference
Opportunity cost rate
Dynamic efficiency
Present value of consumption criterion
Aggregation over Time
Public projects often have effects that extend over many years
ECON 454 AU16
15.1
Lecture 15
Estimation of the value of a statistical life, continued
Stated preference
Hedonic estimation
Compensating wage differentials
Factors affecting VSL
Attitude toward risk
Income
Age
Risk-risk analysis
Substitution risks
Rebound
9.1
ECON 454 AU16
Lecture 9
Risk aversion
Expected utility
Applications
Critiques of expected utility theory
Risk aversion
When the outcomes of projects are not correlated with other sources of income,
most individuals would prefer an amount of money rece
12.1
ECON 454 AU16
Lecture 12
Aggregation methods not using explicit distributional weights
Disaggregation by income level
Pareto approach
Quasi-Pareto approach
Social welfare dominance approach
Summary
Valuation of commodities with incomplete market data
13.1
ECON 454 AU16
Lecture 13
Valuation of commodities with incomplete market data
Use of market data for similar commodities
Hedonic technique
Cost of alternative supply
Valuation of commodities for which there is no market data
Use of market data for re
ECON 454 AU16
11.1
Lecture 11
Aggregation over Individuals
Introduction
Methods using explicit distributional weights
Potential compensation formula
Relation to social welfare formula
Rationales for using it
Feldsteins constant elasticity formula
Harberge
ECON 454 AU16
10.1
Lecture 10
Use of EMV as approximation of CE
Degree of risk aversion
Degree of uncertainty
Size of outcomes relative to income
Outcomes correlated with income
Summary of EMV as approximation of CE
Methods used in practice
Use of EMV as
ECON 454 SP17
14.1
Lecture 14
Valuation of commodities for which there is no market data, continued
Travel cost method
Valuation of risks to life
The Value of a Statistical Life (VSL)
Definition
Travel cost method
The travel cost method assumes that the v
12.1
ECON 454 SP17
Lecture 12
Feldsteins constant elasticity formula, continued
Harbergers alternative cost approach
Aggregation methods not using explicit distributional weights
Disaggregation by income level
Pareto approach
Quasi-Pareto approach
Social
ECON 454 SP17
15.1
Lecture 15
Estimation of the value of a statistical life
Stated preference
Hedonic estimation
Compensating wage differentials
Factors affecting VSL
Attitude toward risk
Income
Age
Risk-risk analysis
Substitution risks
Rebound effects
Im
Economics 454
Second Problem Set
Spring 2017
Due April 10th
I.
Suppose that the BPA is considering a project that would increase the supply of
electricity in the Pacific Northwest. Assume that the market for electricity is
perfectly competitive, the deman
Economics 454
Third Problem Set
Spring 2017
Due April 17th
I.
A. What is the definition of dynamic efficiency? (A one-sentence answer is sufficient).
B. Explain why perfectly competitive markets could attain dynamic efficiency.
II.
A. Write down the stand
Economics 454
Problem Set 1
Spring 2017
Due April 3rd
I.
Standing is an important issue that does not receive much discussion in benefit-cost analyses.
A. Briefly explain what is meant by standing.
B. Consider a transit plan for Seattle for which the geog
ECONOMICS 454
ANSWERS TO MID-TERM EXAM
SPRING 2017
I. In class we discussed several alternative criteria for evaluating whether a public project is
desirable.
A. The social welfare criterion is
20
P dX
0.
1. Define each of the terms.
dXij is the change
ECONOMICS 454
ANSWERS TO SECOND EXAM
SUMMER 2015
I.
Suppose that a proposed project has benefits per person of $50,000 with probability 0.4
and $0 with probability 0.6.
10
A. What is the expected monetary value (EMV) of the benefits of this project to eac
ECONOMICS 454
ANSWERS TO MIDTERM EXAM
SUMMER 2015
1. Consider a society with two consumers, Smith and Jones. The Social Marginal Utility of
Income (SMUY) is 1.0 for Smith and 0.5 for Jones.
10 A. Who do you think has the lower income? Explain why.
Smith.
9.1
ECON 454 SP17
Lecture 9
Expected utility
Utility Function
Applications
Most individuals would prefer an amount of money received for certain to an
uncertain prospect having the same expected monetary value, that is, their CE will be
less than the EMV.
8.1
ECON 454 SP17
Lecture 8
Alternative project decision rules, continued
Rationales for using the alternative rules
Implications of dynamic inefficiency
Sources of dynamic inefficiency
Social value of private investment
Net social benefit formula
Summary
10.1
ECON 454 SP17
Lecture 10
Use of EMV as approximation of CE
Degree of risk aversion
Degree of uncertainty
Size of outcomes relative to income
Outcomes correlated with income
Methods actually used
Use of EMV as approximation of CE
Expected utility theo
13.1
ECON 454 SP17
Lecture 13
Valuation of commodities with incomplete market data
Limited observations on price and quantity, continued
Use of market data for similar commodities
Hedonic technique
Cost of alternative supply
Valuation of commodities for w
ECON 454 AU16
11.1
Lecture 11
Aggregation over Individuals
Introduction
Aggregation methods using explicit distributional weights
Potential compensation formula
Relation to social welfare formula
Rationales for using it
Feldsteins constant elasticity form
7.1
ECON 454 SP17
Lecture 7
Special cases of discounting formulas, continued
Annuity
Annualized value
Alternative project decision rules
Benefit-cost ratio
Internal rate of return
Rationales for using the alternative rules
Annuity
An annuity is an equal a
16.1
ECON 454 AU16
Lecture 16
Stated preference method
Use vs non-use values
Theoretical foundation of stated preference
Potential biases
Applications
Stated preference method
Use vs non-use values
Up to this point we have mainly been discussing revealed