Write your answer underneath each specific question.]
In many developing countries, the governments subsidize the cost of food in order to keep prices low for urban dwellers. Assume that the government pays the suppliers their actual costs for any supply beyond the original equilibrium amount. It then uses tax money to reduce the price urban consumers pay. Using a diagram, identify the costs and benefits of this program and explain what generates them. (You don’t calculate any dollar figures.)
Cost-benefit analysis has been attacked from a variety of perspectives. Clearly state what you believe to be the most important of the conceptually valid criticisms of the use of cost-benefit analysis as a guide for public policy making. To what extent do these criticisms apply to your own benefit-cost project? (250 words maximum)
What insights can you provide for an assessment of this particular method of increasing the use of solar water heaters? Describe your insights fully.
The table below shows costs and benefits of each project. What project(s) would you choose based on different scenarios?
| Cost (in $ millions) | Benefit (in $ millions) | |
| No project | 0 | 0 |
| Project A | 1 | 10 |
| Project B | 10 | 30 |
| Project C | 4 | 8 |
| Project D | 2 | 4 |
| Projects C and D | 7 | 21 |
| Project E | 10 | 8 |
The Boston school district plans to build a new high school. It owns a 10-acre site at a suitable location, site A, which it has held for the past 10 years and for which it originally paid $500,000. In the past 10 years, land prices generally have increased by about 100%, whereas the prices of most goods measured by the CPI have increased only 65%. The current market value of site A, however, is $1,500,000, the value of the land there having increased more than land in many other locations. A building on site A must be sound-proofed, because the street noise level is quite high, and, as a consequence of the sound-proofing, the building must also be air-conditioned. The capital cost of building the high school on site A would be $2,000,000, which would include sound-proofing and air-conditioning.
An alternative, site B, consists of 20 acres and could be bought as a 10-acre site for $1,250,000, or the full 20 acres could be purchased for $2,000,000. The advantage of purchasing the full 20 acres is that a grade school could also be built on the site. Although the grade school is not yet needed, the school district has decided that if it purchases site B, it will purchase the full 20 acres. The capital cost of building the high school on site B is $1,000,000. Site B is not as conveniently located as site A although there is no problem with noise pollution at site B. Because of the less convenient location, site B would incur additional busing costs of $100,000/year. Assume that discount rate is 6% and the time horizon is 30 years.
The school district asks your advice. They assure you that they would be equally satisfied with site A
What is the relationship between sunk costs and opportunity costs?
Explain how double-counting can occur when you are using different methods to value costs and benefits. Be specific in referring to the different methods and explaining how the problem can arise.
Aflatoxin is a toxic mold that can cause liver cancer and grows in peanut and corn crops, especially in low-income countries.
Several options are available to try to reduce the risk
The risk posed by the mold is about 10 deaths per 100,000 bushels.
Cleaning costs $100,000 if applied to 100,000 bushels and reduces the risk by 50%.
Chemical treatment costs $210,000 if applied to 100,000 bushels and reduces the risk by 70%.
The methods are mutually exclusive.
Show how the choice of method depends on the value placed on preventing these deaths.
9) (12 points)
A town on the Gulf Coast is facing a level-three hurricane. If the mayor calls for
an evacuation, then residents will bear a cost of $20 million if the levee protecting the city holds
and a cost of $80 million if the levee fails. If the mayor does not call for an evacuation, then
residents will bear a cost of zero dollars if the levee holds and a cost of $180 million if the levee
fails. Without an engineering inspection of the levee, the mayor estimates that there is a 50
percent chance the levee will hold. An engineering firm could do an inspection prior to the
decision of whether to call for an evacuation. The firm can make a definitive determination of
whether or not the levee will hold in the face of the level-three hurricane. Unfortunately, there area number of towns trying to hire the firm before making the decision. What is the most that themayor should be willing to bid for the firm’s services? Note: it is unlikely that any lives will belost with or without an evacuation so the mayor is comfortable selecting the course of action thatminimizes expected cost.
Draw the decision tree with decision and probability nodes, probabilities and payoffs. Explain your results in words as well.
