CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
3. (a) If the agriculture department behaved as a spender the net benefits would depend on
how it viewed the various impacts of the tariff. There are several possibilities:
The $8 million tariff revenue: The department might view the $8 million tariff
re
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
2. (a) The seven possible alternatives to the status quo have the following costs (millions),
benefits (millions), benefit/cost ratios, and net benefits (millions):
Alternative
Project R without road
Project R with road
Project F without road
Project F wi
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
3. As only one of these projects can be built on the site, they are mutually exclusive. The
comparison is complicated because the swimming pool has an expected life three times longer
than the basketball courts. Consider first the NPV of each project sepa
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
2. (a) Consider, for example, the impact of a $5 admission fee. The following table summarizes
the calculation procedure:
Town
New visit rate
(with $10 admission fee)
77.7 (1.805)(5) = 68.7
65.0 (1.805)(5) = 56.0
37.6 (1.805)(5) = 28.6
53.4 (1.805)(5) = 4
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Econ 370: CostBenefit Analysis and Project Evaluation
Assignment 2
READ THE FOLLOWING INSTRUCTIONS CAREFULLY:
This assignment is due at the start of class on Thurssday, Feb 14th. No late assignments will be
accepted.
You can work on your own or in a gr
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
1. There is a danger that summing the estimates will result in an overestimate of total willingness
to pay. The reason is that some of the respondents from the statewide survey may also be
users and potential users. These respondents would probably give
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Econ 370: CostBenefit Analysis and Project Evaluation
Assignment 5 (PRACTICE ONLY)
Please do the following exercises:
1. An analyst wishing to estimate the benefits of preserving a wetland has combined information
obtained from two methods. First, she su
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
3. First we need an estimate of the demand for Brita water filters that would exist in Foulville
if its water did not have an unpleasant odour. Given that Pleasantville and Foulville have
populations with identical income and education levels, it seems re
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
5. (a) See the figure below and compare the two panels. The initial equilibrium price and
quantity is the same in both figures, as is increase in supply, q 0 . We can see that the
resulting price drop is greater when demand is more inelastic. Since the so
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
3. (a) First we use the elasticity of demand and the initial equilibrium to estimate the slope of
the linear demand function. The elasticity of demand, D is defined as
D =
Q/Q
Q P
=
P/P
P Q
which implies
D
Q
Q
=
.
P
P
Therefore
Q
Q
= D
= 0.8(5000/60) =
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Econ 370: CostBenefit Analysis and Project Evaluation
Assignment 4
READ THE FOLLOWING INSTRUCTIONS CAREFULLY:
This assignment is due at the start of class on Thursday, April 4th. No late assignments will be
accepted.
You can work on your own or in a gr
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
6. (a) Solve for the withoutproject equilibrium:
Qd = Qs
200 2P = 2P 20
P = $55
Q = 90
Then solve for the withproject equilibrium, where Qd = 220 2P because of projects
effect on demand:
Qd = Qs
220 2P = 2P 20
P = $60
Q = 100
The situation is depicted b
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
4. (a) Most jurisdictions pay jurors a small per diem and reimburse them for commuting and
meal expenses. For most jurors, these payments fall short of the opportunity costs of
their time. For employed workers, a more reasonable estimate of the opportunit
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
2. (a) Since elasticity = (q/p)(p/q)
2.5 = (q/p)(40/10)
(q/p) = 0.625
which is the slope of the supply schedule. Assuming linearity, q = a + 0.625p. At the
market equilibrium: 10 = a + (0.625)(40); therefore, a = 15 and the supply schedule
is q = 15 + 0.6
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
5. (a) As a result of the increase in surveillance, the jewelry stores (or their insurance companies) receive benefits of $1,000,000, taxpayers incur costs of $500,000, and the jewelery
robbers incur costs of $600,000.
The answer to this question depends
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
4. (a) Using the data about previous rainfall, we can calculate the probability of future years
being a dry year, a wet year, or a flood year:
probability of dry year, PD , is 71/100 = 0.71
probability of wet year, PW , is 17/100 = 0.17
probability of
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
1. (a) First calculate the present value of the costs, which are realized at the beginning of
year 1 and at the end of year 4:
PV(costs) = $910, 000 + $75, 000/(1 + 0.05)4
= $971,703
If benefits realized at the end of each year:
PV(benefits) = $245,000/(1
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
1. (a) We have
q = 6 0.5p + 0.0002I
= 6 0.5p + 0.0002(60, 000)
= 6 0.5p + 12
= 18 0.5p
The choke price is the price at which q = 0.
0 = 18 0.5p
p = $36
(b)
q = 18 0.5(10) = 13
So if the market price is $10, the person will demand 13 gizmos.
(c) Price elas
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
2. To work in real dollars, the first task is to convert the nominal discount rate to a real discount
rate:
d=
(0.06 0.02)
= 0.0392
(1 + 0.02)
So the real discount rate is 3.92%. (Note: In this case, since the expected rate of inflation is
low, using an a
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
3. First we need convert each impact into consumption equivalents using the shadow price of
capital. If we assume that the all savings for commuters will generate 100% consumption
benefits, we have:
Year
0
1
2
3
4
Construction and
Maintenance Costs($)
700
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
4. (a) The project can be conceptualized as follows:
input X
output Y
Project
First we calculate the overall welfare change in the input market, which is just equal to
the social opportunity cost of the input used.
Solve for the withoutproject equilibriu
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
1. (a) The $9 per dose difference between the price of $25 and the marginal cost of $16 is
monopoly profit.
We will refer to those harmed by the pollution damage as harmed. We will use SC
to indicate a social cost and T to indicate a tranfer. The table be
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Econ 370: CostBenefit Analysis and Project Evaluation
January 2013: Assignment 1
READ THE FOLLOWING INSTRUCTIONS CAREFULLY:
This assignment is due at the start of class on Tuesday, January 29th. No late assignments will be
accepted.
You can work on you
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Econ 370: CostBenefit Analysis and Project Evaluation
Assignment 3
READ THE FOLLOWING INSTRUCTIONS CAREFULLY:
This assignment is due at the start of class on Thurssday, Mar 14th. No late assignments will be
accepted.
You can work on your own or in a gr
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
1. (a) The present value of the real yearly benefits is most easily calculated using the formula
for the present value of an annuity presented in the lecture notes and in Appendix 6a of
the text:
1 (1 + 0.035)25
PV(benefits) = $115,000
0.035
= $1,895,374
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
4. In this part of the question we use the analysts best estimate of the growth rate of the
benefits to calculate the presents values. Specifically, we assume that the annual benefits will
grow at an annual rate of 4% per year over the life of the project
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
2. (a) See figure below:
$/unit
80
S0
S1
40
30
Q
200
400
500
800
The original equilibrium is given by
Qd = Qs
800 10P = 20P 400
P = 40 Q = 400
After the increase in supply
Qd = Qs
800 10P = (20P 400) + 300
P = 30 Q = 500
The value of the increase in consu
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
Valuing NonMarket Goods
We have seen that when inputs and outputs are traded in relatively undistorted markets, prices
are often a good indicator of the social value of a project output or the social opportunity
cost of project input
So whenever possib
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
The Social Discount Rate
When evaluating a project we must choose appropriate weights to apply to impacts that occur
in dierent years
As we have seen, it is standard practice to multiply the impacts occurring in year t by wt
where
wt =
1
(1 + i)t
and i
CostBenefit Analysis and the Economics of Project
ECON370 001

Spring 2014
The Value of Human Life
In many CBAs, a signicant project output is a change in the risk of physical harm and/or
death; eg,
a new highway barrier will reduce the risk of trac fatalities
a reduction in the stringency of air quality regulations will incr