Deck 8: Cost-Benefit Analysis

Question 1

In cost-benefit analysis,there is no problem created by inflation.

A) True
B) False
C) Uncertain

Answer 1

False

Question 2

Money values indexed to a given period are known as

A) nominal.
B) real.
C) inverse.
D) random.

Answer 2

real.

Question 3

The term "future value"

A) can be determined by inverting the formula for present value.
B) is not used in modern public finance analysis.
C) refers to the present value of future money.
D) includes the shadow prices of all goods used in a project.

Answer 3

can be determined by inverting the formula for present value.

Question 4

Cost-benefit analysis is

A) a set of practical procedures for guiding public expenditure decisions.
B) used by the private sector to determine whether certain projects should be undertaken.
C) difficult when benefits and costs are hard to evaluate.
D) mindful of changes over time.
E) all of these answer options are correct.

Question 5

For certain intangibles that cannot be measured,it is best to

A) guess.
B) exclude them from cost benefit analysis,and then calculate how large they must be to reverse the decision.
C) reevaluate using the Hicks-Kaldor criterion.
D) leave it to the private sector to decide on value.

Question 6

Inflation favors

A) lenders.
B) borrowers.
C) neither borrowers nor lenders.
D) both borrowers and lenders.

Question 7

For a government to be efficient,a project should be funded up to

A) MB = 0.
B) MB =
.
C) MC = 0.
D) MC =
.
E) MB = MC.

Question 8

Real dollar amounts are essentially the same as nominal dollars.

A) True
B) False
C) Uncertain

Question 9

Refer to the figure below.If the supply curve returns to its initial level of S_a,the amount of consumer surplus will return to its original level.

A) True
B) False
C) Uncertain

Question 10

The chain-reaction game

A) was cancelled on network TV.
B) counts secondary benefits without counting secondary costs.
C) compounds a bad decision by making more bad decisions,causing unwanted projects to get funded.
D) is double-counting of benefits.

Question 11

When the benefit-cost ratio of a project is greater than 1,the project should be considered.

A) True
B) False
C) Uncertain

Question 12

The value of a human life

A) can be estimated by potential future earnings.
B) can be subjected to cost-benefit analysis.
C) is an intangible that is hard to price.
D) all of these answer options are correct.

Question 13

When wages are viewed as benefits instead of costs of a project,it is an example of the

A) labor game.
B) chain-reaction game.
C) double-counting game.
D) dating game.

Question 14

Risk is _________ a part of cost-benefit analysis.

A) never
B) always
C) unable to be calculated
D) decided by others whether to be

Question 15

The rate at which future money must be discounted is known as the

A) rate of inflation.
B) exposure rate.
C) discount rate.
D) time rate.

Question 16

The term "present value" refers to the future value of present day money.

A) True
B) False
C) Uncertain

Question 17

Internal rate of return analysis suggest that a project should be undertaken if

A) NPV > 0.
B) MB > 0.
C) IRR > discount rate.
D) discount rate > inflation rate.

Question 18

The value that society places on consumption that is sacrificed in the present is called

A) social marginal costs.
B) social marginal damages.
C) social rate of discount.
D) social returns.

Question 19

Government budgets are

A) always adhered to.
B) not necessary.
C) guides for project analysis.
D) easy to create.

Question 20

Benefits of a project

A) can change over time.
B) can be difficult to measure.
C) should be larger than costs.
D) are sometimes intangible.
E) all of these answer options are correct.

Question 21

Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.Suppose that the government feels that the grant is not enough and,in addition,imposes a price ceiling of $270.What will happen to consumer surplus? What are the drawbacks?

Question 22

If the interest rate is 5 percent,what is the present value of $5,000 five years from now?

Question 23

Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.
(A)How much consumer surplus is there?
(B)Suppose that a grant is given so that the supply of housing is increased.This increase changes the supply curve to P = 3Q.How much does consumer surplus change because of the grant?

Question 24

What is the interest rate that should be used to ensure a total balance of $3,000 two years from now if you have a starting balance of $2,000?

Question 25

Consider two projects.The first project pays benefits of $90 today and nothing else.The second project pays nothing today,nothing one year from now,but $100 two years from now.Which project would be preferred if the discount rate were 0%? What if the rate increased to 10%?

Question 26

Some analysts have argued that cost-benefit analysis does not take into account issues involving equity and is nothing more than an efficiency test.Do you agree with this statement?

Question 27

Unlike other methods,present value analysis indicates that a project should be undertaken if the NPV is greater than zero regardless the income distribution.

A) True
B) False
C) Uncertain

Question 28

Costs should always be evaluated before determining benefits.

A) True
B) False
C) Uncertain

Question 29

Why is it that projects that have negative net present values are sometimes undertaken?

Question 30

The government has hired you to advise them on the merits of a project that is being proposed.The project is expected to generate benefits of 14 million dollars today,5 million dollars in one year from today,and 1 million dollars in two years from today.(These are the only years of concern.)The project costs nothing today,but will cost 20 million dollars in two years.Assume the interest rate is 10%.If the benefit-cost ratio is greater than 1,the project should be allowed.What is your policy suggestion?

Question 31

Cost-benefit analysis is a relatively new tool developed and used first by NASA.

A) True
B) False
C) Uncertain

Question 32

The internal rate of return is likely to lead to incorrect decisions.

A) True
B) False
C) Uncertain

Question 33

Some people prefer more risky projects than less risky projects.But some people prefer less risky projects to those that are more risky.What explains this behavior?

Question 34

The U.S.government uses discount rates that lead to consistent outcomes.

A) True
B) False
C) Uncertain

Question 35

One of the steps in cost-benefit analysis is distinguishing time frames.

A) True
B) False
C) Uncertain