Question 1

Suppose a radar-activated braking system that can help prevent crashes is an option on a new car. It costs $600 and reduces the chance of dying in an auto accident by 1/700. The implicit value placed on life by a person who does not have the system installed is therefore:

Accepted Answer

The answer of Suppose a radar-activated braking system that can...

Question 2

The U.S. government does not allow toggle switches for power windows in automobiles. The National Highway Traffic Safety Administration found that the regulation will save about two children every three years and have negligible costs because the industry will have plenty of time to incorporate new switches into future vehicles. Evaluating this rule in terms of costs and benefits, an economist most likely would conclude that:

Accepted Answer

An economist would weigh the costs and benefits of this regulation and based on the given information, the benefits of saving two children every three years outweigh the negligible costs. Therefore, it would be seen as a good decision. Option B is incorrect because the industry needs adequate time to comply with the regulation. Option C is incorrect because even one child's life is valuable and should be considered in the decision-making process. Option D is irrelevant as the ages of the children does not affect the costs and benefits analysis of the regulation.

Question 3

A government airline safety regulation reduces the probability of a fatal airline crash by 0.005. If the costs associated with each airplane crash are equal to $600 million and the costs of performing more frequent safety inspections equal $4 million, the regulation is:

Accepted Answer

The answer of A government airline safety regulation reduces the...

Question 4

Most economists agree that the best way to evaluate policy is to:

Accepted Answer

Most economists agree that the best way to evaluate policy is to compare the actual benefits of the policy with the actual costs. This allows for a quantitative analysis of the effectiveness of the policy and provides a more objective approach to evaluation. Options A, B, and C are subjective and do not offer a clear evaluation of the policy's effectiveness.

Question 5

Suppose a radar-activated braking system that can help prevent crashes is an option on a new car. It costs $600 and reduces the chance of dying in an auto accident by 1/700. The implicit value placed on life by a person who has the system installed is therefore:

Accepted Answer

To calculate the implicit value placed on life, we need to divide the cost of the system ($600) by the reduction in the chance of dying in an auto accident (1/700).

$600 ÷ (1/700) = $420,000

Therefore, the implicit value placed on life by a person who has the system installed is at least $420,000.

Question 6

The cost/benefit approach that economists agree on requires an economist to determine a quantitative cost and benefit for:

Accepted Answer

The cost/benefit approach requires consideration of all costs and benefits, including ones that are difficult to quantify such as human life. Therefore, option C states that economists consider everything, including life, is the best choice.

Question 7

A government airline safety regulation reduces the probability of a fatal airline crash by 0.005. If the costs associated with each airplane crash are equal to $600 million, the regulation has an expected marginal benefit of at least:

Accepted Answer

The expected marginal benefit is calculated by multiplying the reduction in the probability of a crash (0.005) by the cost associated with each crash ($600 million). Thus, 0.005 * $600 million = $3 million.

Question 8

Basing decisions on marginal cost and marginal benefit means that people should:

Accepted Answer

Basing decisions on marginal cost and marginal benefit means weighing the costs and benefits of each option and choosing the option that provides the highest net benefit. This allows people to make rational decisions that take into account the opportunity costs of their choices. Choice A is incorrect because taking no chances may not be the most efficient or beneficial option. Choice B is incorrect because Pareto optimal choices may not be possible or applicable in all situations. Choice D is incorrect because making the choice that provides the highest net cost would not be rational.

Question 9

If a person would buy equipment with safety features that cost $100 extra and those features reduce the chance of having a fatal accident by 1/500, the person is implicitly valuing his or her life at a minimum of:

Accepted Answer

The answer of If a person would buy equipment with...

Question 10

Which of the following statements is true?

Accepted Answer

People make decisions every day that reflect how much they value their own lives. For example, wearing a seatbelt or crossing the street at a crosswalk instead of in the middle of the road are actions that indicate people value their lives and are willing to take precautions to protect themselves. This contradicts option B, which suggests that only economists place a finite value on life. Option A is not necessarily true for all people, as different individuals may have varying degrees of risk aversion. Option C is also not entirely accurate, as economists consider a variety of factors such as expected years of life remaining and the cost of medical treatment, not just the cost of dying.

Question 11

A person will pay $1,000 (and not more)extra for a bigger car that he or she feels is safer. This car will reduce the chance of dying in an automobile accident by 1/550. That means that the buyer is implicitly valuing his or her life at roughly:

Accepted Answer

The calculation is based on the cost per reduced risk of death. Paying $1,000 to reduce the chance of dying by 1/550 implies a valuation of $1,000 * 550 = $550,000.

Question 12

A government policy maker is trying to decide which of four methods of reducing highway noise in a residential area should be implemented. She is looking at these four options: $$\begin{array} { | c | c | c | } 
\hline \text { Plan } & \text { Benefits } & \text { Custs } \
\hline \text { A } & \$ 500,000 & \$ 490,000 \
\hline \text { B } & \$ 550,000 & \$ 530,000 \
\hline \text { C } & \$ 570,000 & \$ 540,000 \
\hline \text { D } & \$ 600,000 & \$ 580,000 \
\hline
\end{array}$$ If she uses the cost/benefit logic of economics, which plan will she propose?

Accepted Answer

Plan C has the highest net benefit (benefits minus costs), with a net benefit of $30,000 (\$570,000 - \$540,000), compared to the net benefits of the other plans: Plan A ($10,000), Plan B ($20,000), and Plan D ($20,000).

Question 13

Direct shipment of wine to individuals is illegal. Some wineries want the law revoked. They argue that the ability to ship directly to consumers helps small wineries and that shipping bans unfairly protect home-state wineries, raising prices to consumers. Others argue that the bans allow states to collect tax revenues and to keep wine from being sold to minors. What would most economists say about whether this ban should stay or be eliminated?

Accepted Answer

Economists would likely analyze the costs and benefits of lifting the ban before making a recommendation. There are potential benefits to small wineries and consumers from increased competition and lower prices, but there are also concerns about tax revenues and preventing underage alcohol sales. Therefore, more information is needed to assess whether lifting the ban would be beneficial overall.

Question 14

Suppose a person can play the lottery for $1.00. His chance of winning $25 million is 1 in 50 million. If there are no other costs or benefits involved, the logic of cost/benefit analysis says:

Accepted Answer

The expected value of playing the lottery is:
(1/50,000,000) x $25,000,000 - $1.00 = -$0.50
Since the expected value is negative, it is not economically rational to play the lottery. Therefore, the person should not play the lottery.

Question 15

Performing cost/benefit analysis involves:

Accepted Answer

Performing cost/benefit analysis involves quantifying both the costs and benefits associated with a given activity, but deeming the activity worthwhile only if the benefits exceed the costs. Simply looking for activities where costs exceed benefits (A) would mean that no activities would be deemed worthwhile. Options C and D are incorrect as cost/benefit analysis can include both explicit and implicit costs and benefits, not just those that are explicitly monetary.

Question 16

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. Failure to redesign the gas tank location therefore implies that the automobile company is implicitly valuing human life at:

Accepted Answer

To calculate the implied value of human life, we need to divide the cost of repositioning the gas tank by the number of expected deaths prevented:

$11 per vehicle x 12.5 million vehicles = $137.5 million cost of redesigning

$137.5 million cost / 180 prevented deaths = $763,888.89 per prevented death

Therefore, if the automobile company decides not to redesign the gas tank, they are implicitly valuing human life at $763,888.89 or less. Choice C is the only option that reflects this value.

Question 17

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. It is expected that 180 deaths will occur if the gas tank location is not redesigned. If a human life can be valued at $500,000, the expected benefit of redesigning the location of the gas tank is:

Accepted Answer

The answer of The cost of repositioning an automobile gas...

Question 18

The cost of repositioning an automobile gas tank for greater safety is $11 per vehicle for 12.5 million vehicles. The automobile company places a value on life of $500,000. To justify redesigning the location of the gas tank, the number of deaths expected to occur if the gas tank location is not redesigned would have to be at least:

Accepted Answer

The total cost of repositioning the gas tank is $11 per vehicle for 12.5 million vehicles, which equals $137.5 million ($11 * 12,500,000). To justify this cost, the savings from avoiding deaths must equal or exceed this amount. Given the company values a life at $500,000, dividing the total cost by the value per life gives the minimum number of deaths that need to be prevented to justify the cost: $137,500,000 / $500,000 = 275.

Question 19

Assume that running in a marathon increases a person's risk of dying from almost negligible to about 1 in 50,000. If people know this risk and still choose to run marathons, economists would most likely conclude that people:

Accepted Answer

The fact that people are willing to take on a small but non-negligible risk suggests that they place a finite value on their lives. If people were irrational or placed no value on their lives, they would not take on any risk at all. Self-control problems may be a factor in some cases, but it is not the most likely explanation for why people choose to run marathons despite the small risk of death.

Question 20

A proposal to build a dam on a wild river may look like a good idea from the cost/benefit study done by the Army Corps of Engineers, but an analysis done by the Sierra Club might suggest that the dam would be a complete waste of money. Differences in cost/benefit studies such as this are expected because:

Accepted Answer

Cost/benefit studies involve assigning values to various outcomes, and items that do not have market prices, such as the environment, are difficult to objectively value. Therefore, differences in cost/benefit studies are expected due to subjective valuations and perspectives. Option A and B are too extreme and baseless assumptions. Option C is incorrect since cost/benefit studies aim to assess what will happen under different scenarios.

Quiz 23: Microeconomic Policy, Economic Reasoning, and Beyond