The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
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Introduction and Overwiew of CostBenefit Analysis
CostBenefit Analysis
CostBenefit Analysis seeks to decide whether an investment project should be undertaken
considere
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
YORK UNIVERSITY
Department of Economics
ECON38I0: Project Analysis
Midterm Exam: Sample #1
Time Allowed: 2 Hours
This total marks in this test are 50. The test is divided into two parts:
Part I  problem format  is worth 40 marks (40 of the total mark of
A Simple Example of Discounting Social Costs and Benefits
Assume that if Project X is carried out only two people will be affected, Tim and Romeo, as follows:
The project is good for Romeo but bad for Tim. Is it beneficial to society? In each of the follo
Shadow Price Calculation Examples
Assume:
MWTP(q ) = A  B q
so that p=MWTP(q) is the inverse demand
and qd = A/B  (1/B)p is the demand (D)
MC(q) = c + d q
so that p=MC(q) is the inverse supply, if the market is competitive
and q = c/d + (1/d) q is the
Economic Evaluation of Private vs Public Projects
PRIVATE PROJECT (a project undertaken by a Private Firm)
Example: New Product Line
Benefits: Revenue from Sales
Costs: Innovation, Production Cost, Marketing, Advertising etc
Reduced Sales from Substitute
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
Cost/Benefit Analysis: Costs and Factors of Production
We first examine the cost structure of firms in the period when capital is fixed to understand
the importance of marginal cost in the determination of profit maximizing output. We do this by
deriving
Externalities and Public Goods
EXTERNALITIES
An externality is an unintended effect, negative or positive, the action of one "agent" (person,
firm) has on others ("third parties") for which no compensation is paid or no reward is received
in the market pl
Compouding and Discounting Factors
assuming compound interest at perperiod rate i
Single Payment, P today or F in the future i.e. n periods from today
Present Value of $1 paid/received n periods from today
Present Value of $ F paid/received n periods fro
EFFICIENCY
Consumer Behaviour and Efficiency
WTP(Q) = total willingness to pay (total benefit from consumption)
MWTP(Q) = marginal willingness to pay (marginal benefit)
= amount consumer is willing to pay for one more unit
Observe: MTWP depends on the tot
Evaluating Government Projects
Example 1:
Project A: build a bridge to be used by producers in a given local market. If built, it will reduce the costs of
producers such that industry marginal cost will be lower.
The bridge production cost is $X
What is t
A Simple Example of Discounting Social Costs and Benefits
Assume that if Project X is carried out only two people will be affected, Tim and Romeo, as follows:
The project is good for Romeo but bad for Tim. Is it beneficial to society? In each of the follo
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
ECON 3810. M Midterm
York University
19th July 2016
Instructions. This Exam contains 5 questions. Answer any 4. If you answer more than 4 only the rst 4
will be marked Each question is worth 10 points.
Question 1.
Explain what the Pareto Criterion is in t
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
Simplex Lecture Example: Standard and Deluxe Bags
Maximize total profit from Standard ($10/bag profit) and Deluxe ($9/bag profit) bags
Standard
Deluxe
Capacity
Production hours/bag
Cutting and ewing Finishing Inspecting &
S
Dyeing
Packaging
0.7
0.5
1
0.1
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
ATKINSON COLLEGE, YORK UNIVERSITY
December Examinations, Sample #1
ECON3810: Project Analysis
Duration  3 hours
No Aids Allowed
Nonprogrammable calculators only
INSTRUCTIONS:
This examination consists of TWO PARTS
Part I
10 diagrammatic/calculation ques
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
lDemand and Consumer Surplutf
Our basic rule for the choice of an expenditure (project) is that benefits exceed costs where
benefits and cost include any welfare gain or loss due the expenditure on the project. Costs are
thought of as 'opportunity costs'
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
CostBenefit Analysis: Discount Rates
INVESTMENT CRITERIA
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2. operating costs gl*!=l1:"9ifbyi.:9*_fgg*
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or services.
This distinction is similar to the microeconomic distinction between fixed cost
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
7.
Duality
Duality in Linear Programming
For every maximization (minimization) problem in Linear Programming, there exists an
obverse minimization (maximization) problem.
minimizatio") rs call"d the
Jlq,nitiglg.oblem (maximization or
p.i
(minimization or
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
5.
Linear Programming
LINEAR PROGRAMMING
Our discussion of constrained optimization assumed that
a) Constraints were in form of equations, rather than inequalities
b) Output functions were continuous, i.e., all combinations of capital and labour are possi
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
CostBenefit Analysis: Risk Analysis
So far we have analyzed costs and benefits under the assumption that they are certain but now we
relax that assumption.
We distinguish between
1.
Risk
Risk assumes that probabilities of future outcomes are known
2.
Unc
The Economics of Project Appraisal and Feasibility
ECON 3810

Summer 2011
6. Shadow Prices
SHADOW PRICES
We have so far examined how competitive market prices with certain assumptions give
Pareto optimal exchange and production and thus are a true measure of costs and benefits to
society. Relative commodity prices must reflect
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
American Finance Association
A Note on Reinvestment Assumptions in Choosing between Net Present Value and Internal
Rate of Return
Author(s): Carlton L. Dudley, Jr.
Source: The Journal of Finance, Vol. 27, No. 4 (Sep., 1972), pp. 907915
Published by: Wile
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
YORK UNIVERSITY
ECON3810M
Economics of Project Analysis
Midterm Exam, February 27, 2013
Time Allowed: 2 Hours
The total marks in this test are 60. The test is divided into two parts:
Questions 1 to 5: Problem format is worth 50 marks (50 of the total mark
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
N. Paul Loomba, Linear Programming, McGrawHill, 1964
This in an example for Loomba (1964)
Note that there are 3 variables and 3 constraints so that there is only one solution (hence all iterations lead to the same result)
I solve the original (primal) ma
The Economics of Project Appraisal and Feasibility
ECON 3810

Winter 2014
YORK UNIVERSITY
Department of Economics
ECON3810: Project Analysis
Final Exam: Sample #2 Answers
Duration  3 hours
No Aids Allowed
Nonprogrammable calculators only
INSTRUCTIONS:
This examination consists of TWO PARTS
Part I
10 diagrammatic/calculation q
Compounding / Discounting Examples and Basic Principles for Project Appraisal
The amount that must be deposited today in order to pay 10,000 each year for the next 10 years.
The constant amount that must be paid in each of the next 10 years to pay back a