Deck 6: Cost-Benefit Analysis and Government Investments

Question 1

The social rate of discount must equal the opportunity cost of funds used to finance a project.

Answer 1

True

Question 2

The present value of a stream of net benefits for 20 years will be less than the sum of those benefits unless the social rate of discount is zero.

Answer 2

True

Question 3

Assuming costs are paid immediately, an increase in the social discount rate will lower the benefit-cost rate.

Answer 3

True

Question 4

If the benefits of a new bridge exceed the costs, then there will be a net social gain from building the bridge.

Question 5

Program budgeting differs from line budgeting in that:

A) all agencies with similar missions are budgeted for together, irrespective of the government department to which they belong.
B) proposed expenditures in a given government department are compared only with other pro?grams in the same department.
C) a computer program is used.
D) the effect of programs on the distribution of income is explicitly considered.

Question 6

The higher the social rate of discount, the more government projects for which benefits will exceed costs.

Question 7

A cost-effective program mix is one that accomplishes a given mission at minimum cost.

Question 8

If increases in agricultural land values are viewed as a benefit of an irrigation project, then the market value of projected increased crops should also be included as a benefit of the project.

Question 9

The marginal rate of technical substitution is the slope of the isoquant line.

Question 10

Cost-benefit analysis is a technique for determining the net benefits of alternative government projects.

Question 11

A lower discount rate favors more capital-intensive investments that yield net benefits further into the future.

Question 12

If the marginal social cost of a new road exceeds its marginal social benefit, then building the road will result in a net social gain.

Question 13

An increase in the profits of gasoline dealers on an improved road is a benefit of the road project.

Question 14

Program budgeting seeks to group agencies with similar purposes for budgeting, independent of the government department to which they belong.

Question 15

Cost-benefit analysis can be viewed as a way of minimizing the cost of any given government output.

Question 16

The benefits of widening a road consist only of the cost savings to existing users of the road.

Question 17

The marginal rate of technical substitution where the slope of the isocost and isoquant lines are equal) is the ratio of the prices of the two goods.

Question 18

Building a new sports stadium results in food sales at the facility. These food sales should be con?sidered a benefit of the new stadium.

Question 19

In program budgeting, an agency's program is:

A) its mission.
B) a combination of government activities designed to produce a distinguishable output.
C) its output.
D) the cost of its output.

Question 20

If a project has a B/C ratio of 0.9, its approval will result in net benefits to citizens of the nation.

Question 21

The social rate of discount is currently 10 percent. This implies that:

A) all government projects will yield a 10-percent return.
B) the opportunity cost of funds for all government projects is 10 percent.
C) more capital-intensive projects will be ranked over less capital-intensive projects.
D) the opportunity cost of funds for all government projects is 20 percent.

Question 22

If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, then the cost-effective mix between the two goods occurs when:

A) the slope of the associated isoquant line equals the price of A divided by the price of B.
B) the marginal rate of technical substitution equals the price of A divided by the price of B.
C) the marginal rate of technical substitution equals the price of B divided by the price of A.
D) either a or c.

Question 23

Assuming a full-employment economy, which of the following should not be included as a benefit of a government project to build a new highway when doing a cost-benefit analysis?

A) the income of construction workers employed to build the highway
B) the value of the time saved on trips between points to be served by the new highway
C) the increase in retail sales at sites bordering the highway
D) both a and c

Question 24

The mission of a government agency is:

A) its program.
B) its output.
C) its cost.
D) a measure of the inputs it uses.

Question 25

A cost-benefit analysis of an irrigation project shows that the ratio of the discounted present value of benefits to costs is less than one. This implies that:

A) the net benefit of the project is positive.
B) the net benefit of the project is negative.
C) efficiency can be attained by undertaking the project.
D) the project will redistribute income to the poor.

Question 26

The process of taking a previous period's budget and making minor changes to produce the current year's budget is called:

A) zero based budgeting.
B) enumerated budgeting.
C) developmental budgeting.
D) incremental budgeting.

Question 27

If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the marginal rate of technical substitution of the corresponding isoquant line is:

A) the marginal product of good B divided by the marginal product of good A.
B) the negative of the marginal product of good B divided by the marginal product of good A.
C) the marginal product of good A divided by the marginal product of good B.
D) the negative of the marginal product of good A divided by the marginal product of good B.

Question 28

Program budgeting is a way to:

A) minimize the cost of producing a given amount of government services.
B) rank projects according to their marginal net benefits.
C) maximize the output of government.
D) increase government spending.

Question 29

A new road will lower the cost of a trip between two cities from $20 to $10. Currently, 100,000 trips per year are made between the two points. The benefit of the new road will:

A) be $1 million per year.
B) exceed $1 million per year.
C) be less than $1 million per year.
D) accrue only to current users.

Question 30

Which of the following techniques is used by economists to value years of life saved by a highway safety program?

A) measuring the increased income that it allows
B) trying to get those affected by the improved safety to reveal their willingness to pay for the reduced risk of death
C) either a or b
D) none of the above, because economists believe that it is impossible to put a value on life

Question 31

If the quantity of good A is on the vertical axis and the quantity of good B is on the horizontal axis, the slope of the corresponding isocost line is:

A) the price of good B divided by the price of good A.
B) the negative of the price of good B divided by the price of good A.
C) the price of good A divided by the price of good B.
D) the negative of the price of good A divided by the price of good B.

Question 32

If the social rate of discount falls, then the efficient amount of government capital spending will:

A) increase.
B) decrease.
C) be unaffected.
D) fall to zero.

Question 33

The social rate of discount used in cost-benefit analysis measures the:

A) benefits of a project.
B) cost of a project.
C) rate of return on the project.
D) opportunity cost of displaced private saving or investment.

Question 34

Explain how a system of program budgeting has the potential to improve efficiency within the government sector of an economy. How does program budgeting differ from line budgeting? Use isoquant analysis to show how program budgeting achieves efficiency. What are the advantages and disadvantages of zero-base budgeting?

Question 35

Cost-benefit analysis is a way to:

A) minimize the cost of producing a given amount of government services.
B) rank projects according to their marginal net benefits.
C) maximize the output of government.
D) increase government spending.

Question 36

A government agency has a new hydroelectric project that will take 15 years to build before it pro?vides any benefits. The net present value of the project will be highest under which of the following discount rates?

A) 0 percent
B) 1 percent
C) 3 percent
D) 5 percent

Question 37

The nominal interest rate is:

A) the real rate of interest when there is inflation.
B) less than the real rate of interest when there is inflation.
C) inflation adjusted.
D) not adjusted by inflation.

Question 38

A proposed road improvement project is expected to increase pollution in an urban area. The pollu?tion damage should:

A) be considered a cost of the project.
B) be considered a benefit of the project.
C) not be considered in evaluation of the project.
D) be used as a justification to increase the social rate of discount.

Question 39

Suppose that a business investment is subject to a 50-percent tax but that the return to private savings is not taxed. The after-tax rate of return on business investment is currently 9 percent. If a proposed government project is predicted to displace business investment, then the social rate of discount is:

A) 9 percent.
B) 18 percent.
C) 36 percent.
D) infinite.