Deck 15: Economics of Public Sector Decisions

Question 1

The marginal social cost of a good reflects the value of resources used in its production.

Answer 1

True

Question 2

The benefit-cost ratio B/C) for an activity is equal to the total value of its benefits divided by the total value of its cost.

Answer 2

False

Question 3

The marginal social cost of a good is equal to any marginal external costs imposed on third parties by its production.

Answer 3

False

Question 4

Where the production of public goods is concerned, no incremental activity j) should be undertaken where MSC_j > MSB_j.

Question 5

Economists consider a pure public good to be indivisible if it is difficult or impossible to keep it from consumers who do not pay for it.

Question 6

The net social benefit of a good is equal to its total social benefit less its total social cost.

Question 7

The marginal social benefit of a good is equal to any additional external or third-party benefits the good provides.

Question 8

The marginal social benefit of a good is equal to the marginal private benefits the good provides plus any additional external or third-party benefits.

Question 9

The marginal social cost of a good includes the value to consumers of any alternative product of products whose production is reduced or eliminated as a result of the production of an incremental unit of output.

Question 10

To maximize the net social benefit received from a good or service, it should be produced up to the point where its total social benefit is equal to its total social cost.

Question 11

Economists consider a pure public good to be indivisible if one person cannot consume a unit of it apart from other units.

Question 12

State representative James Smith has proposed a new state supported convention facility in the state's capitol. The convention facility would provide the state with $400,000 in net cash flow lease receipts) and would cost $3,000,000. The state Planning Department normally uses a 9% discount rate when evaluating capital projects. If the project has a 15 year life, the state should accept the proposal.

Question 13

A pure public good is a product or service that is indivisible and non-excludable.

Question 14

Economists consider a pure public good to be non-excludable if it is difficult or impossible to keep it from consumers who do not pay for it.

Question 15

The indirect costs of a project are those costs related to externalities that are outputs of the project not accounted for in outlays of the government for project components.

Question 16

City Council member Alfred Garcia has proposed a new airport facility. The airport facility would provide the city with $200,000 in net cash flow landing fees, rent, etc.) and would cost $1,900,000. The city's Planning Department normally uses a 10% discount rate when evaluating capital projects. If the project has a 20 year life, the city council should adopt Garcia's proposal.

Question 17

The benefit-cost ratio B/C) for an activity is equal to the present value of its benefits divided by the present value of its cost.

Question 18

To maximize the net social benefit received from a good or service, it should be produced up to the point where its marginal social benefit is equal to its marginal social cost.

Question 19

The marginal social cost of a good is equal to marginal private cost of producing it plus any marginal external costs imposed on third parties by its production.

Question 20

In calculating direct costs of a public investment project some items will be difficult to calculate because they are implicit.

Question 21

The indirect benefits of a project or activity are external, or third party, benefits.

Question 22

Which of the following would be considered an indirect cost of a public good?

A) Initial capital outlay.
B) Research and planning outlays.
C) Maintenance expenses over the life of the project.
D) Disruption of traffic caused by subway construction.
E) Operating expenses over the life of the project.

Question 23

One of the strengths of cost-benefit analysis is that the relatively low cost of performing a credible cost-benefit analysis makes the approach practicable for many public investment decisions.

Question 24

One of the strengths of cost-benefit analysis is that when indirect benefits must be estimated there are strict standards which prevent the analysis from being "cooked" to show what its sponsors wish to show.

Question 25

One of the pitfalls of cost-benefit analysis is that indirect benefits must be estimated but no strict standards are used.

Question 26

The State Legislature is attempting to choose two projects from the following:

If the state uses a discount rate of 6% and all the above projects are estimated to have a life of 20 years, the Legislature should accept Project C.

Question 27

In the United States, public sector purchases of goods and services:

A) amount to about 33 percent of GDP.
B) amount to about 15 percent of GDP.
C) amount to about 29 percent of GDP.
D) amount to about 10 percent of GDP.
E) are not included in the calculation of GDP.

Question 28

To maximize the net social benefit received from a good or service, it should be produced up to the point where:

A) total social benefit is equal to its total social cost.
B) its marginal private benefit is equal to its marginal social cost.
C) its marginal social benefit is equal to its marginal social cost.
D) its marginal social benefit is equal to its marginal private cost.
E) its marginal private benefit is equal to its marginal private cost.

Question 29

All of the following would be considered a direct cost of a public good EXCEPT:

A) initial capital outlay.
B) research and planning outlays.
C) maintenance expenses over the life of the project.
D) disruption of traffic caused by subway construction.
E) operating expenses over the life of the project.

Question 30

In calculating costs of a public investment project, indirect costs, because of their partly nonmarket nature, are often easily estimated.

Question 31

The direct benefits of a project or activity are the benefits obtained by the users of the project or activity.

Question 32

In calculating costs of a public investment project, indirect costs are always difficult to estimate because of their partly nonmarket nature.

Question 33

A pure public good is a product or service that:

A) is divisible and nonexcludable.
B) is indivisible and nonexcludable.
C) is indivisible and excludable.
D) is divisible and excludable.
E) is invisible and nonexclusive.

Question 34

One of the pitfalls of cost-benefit analysis is that the opportunity-cost approach to the social rate of discount may bias the analysis against worthwhile public undertakings.

Question 35

The benefit-cost ratio for an activity is equal to:

A) the total value of its benefits divided by the total value of its cost.
B) the marginal private benefits the good provides less any additional external or third-party benefits.
C) the present value of its benefits divided by the present value of its cost.
D) the marginal private benefits the good provides divided by any additional external or third-party costs.
E) the present value of its benefits less the present value of its cost.

Question 36

The marginal social benefit of a good is equal to:

A) the marginal private benefits the good provides plus any additional external or third-party benefits.
B) any additional external or third-party benefits the good provides.
C) the marginal private benefits the good provides.
D) the marginal private benefits the good provides less any additional external or third-party benefits.
E) the present value of its benefits divided by the present value of its cost.

Question 37

One of the pitfalls of cost-benefit analysis is that the sheer cost of performing a credible cost-benefit analysis makes the approach unfeasible for many public investment decisions.

Question 38

One of the strengths of cost-benefit analysis is that the opportunity-cost approach to the social rate of discount is an unbiased method of introducing cost of funds into the analysis of worthwhile public undertakings.

Question 39

The social rate of discount is the discount rate appropriate for evaluating public sector projects.

Question 40

Economists consider a pure public good to be nonexcludable if:

A) it is difficult but not impossible to keep it from consumers who do not pay for it.
B) it is difficult or impossible to keep it from consumers who do not pay for it.
C) it is difficult but not impossible for one person to consume a unit of it apart from other units.
D) one person cannot consume a unit of it apart from other units.
E) one person cannot keep it from consumers who do not pay for it.

Question 41

Which of the following projects would be acceptable from a cost-benefit standpoint if the applicable discount rate is 9%?

Question 42

Which of the following projects would be acceptable from a cost-benefit standpoint if the applicable discount rate is 6%?

A) A only
B) B only
C) A & B
D) A & C
E) B & C

Question 43

Which of the following projects would be acceptable from a cost-benefit standpoint if the applicable discount rate is 9%?

A) A only
B) B only
C) A & B
D) A & C
E) B & C

Question 44

State representative James Smith has proposed a new state supported convention facility in the state's capitol. The convention facility would provide the state with $400,000 in net cash flow lease receipts) and would cost $3,000,000. The state Planning Department normally uses a 9% discount rate when evaluating capital projects. Should the state legislature adopt Smith's proposal if the project has a 15 year life? Why or why not?

Question 45

City Council member Connie Jefferson has proposed a new basketball facility. The basketball facility would provide the city with $300,000 in net cash flow rent, etc.) and would cost $1,500,000. The city's Planning Department normally uses a 10% discount rate when evaluating capital projects. Should the city council adopt Jefferson's proposal if the project has a 10 year life? Why or why not?

Question 46

All of the following are pitfalls of cost-benefit analysis of a public good EXCEPT:

A) When indirect benefits must be estimated there are strict standards which prevent the analysis from being "cooked" to show what its sponsors wish to show.
B) Even though indirect benefits must be estimated no strict standards are used.
C) An analysis can be "cooked" to show what its sponsors wish to show.
D) The opportunity-cost approach to the social rate of discount may bias the analysis against worthwhile public undertakings.
E) The sheer cost of performing a credible cost-benefit analysis makes the approach unfeasible for many public investment decisions.

Question 47

The State Legislature is attempting to choose one project from the following:

If the state uses a discount rate of 6% and all the above projects are estimated to have a life of 20 years, which project should the Legislature accept?

Question 48

The State Legislature is attempting to choose two projects from the following:
If the state uses a discount rate of 6% and all the above projects are estimated to have a life of 20 years, which project should the Legislature accept?

A) A only
B) B only
C) A & B
D) A & C
E) B & C

Question 49

Which of the following projects would be acceptable from a cost-benefit standpoint if the applicable discount rate is 9%?

Question 50

City Council member Alfred Garcia has proposed a new airport facility. The airport facility would provide the city with $200,000 in net cash flow landing fees, rent, etc.) and would cost $1,900,000. The city's Planning Department normally uses a 10% discount rate when evaluating capital projects. Should the city council adopt Garcia's proposal if the project has a 20 year life? Why or why not?

Question 51

Which of the following projects would be acceptable from a cost-benefit standpoint if the applicable discount rate is 6%?