Deck 8: Cost-Benefit Analysis

Question 1

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 1

can be determined by inverting the formula for present value.

Question 2

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.

Answer 2

counts secondary benefits without counting secondary costs.

Question 3

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.

Answer 3

labor game.

Question 4

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 5

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 6

Government budgets are

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

Question 7

Real dollar amounts are essentially the same as nominal dollars.

Question 8

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)are all of the above.

Question 9

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

Question 10

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 11

Cost-benefit analysis is

A)a set of practical procedures for guiding pubic 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 the above.

Question 12

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

Question 13

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 14

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

Question 15

For certain intangibles that can not 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 16

Inflation favors

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

Question 17

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)is all of the above.

Question 18

Money values indexed to a given period are known as

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

Question 19

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 20

The government's decision to reduce the number of accidental deaths in the home by 100,000

A)would be very easy to do.
B)was tried before but found to be too cumbersome to be handled at the federal level.
C)could be accomplished using several methods that need to be evaluated for costs.
D)was never a good idea.

Question 21

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

Question 22

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 23

Costs should always be evaluated before determining benefits.

Question 24

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 25

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

Question 26

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

Question 27

Refer to Figure 8.1 in your textbook.If the supply curve returns to its initial level of Sa,the amount of consumer surplus will return to its original level.

Question 28

Refer to Figure 8.1 in your textbook.If the demand curve can be characterized by the equation Q = 10 - P,how much increase in consumer surplus will occur when the price of avocados falls from $2.89 to $1.35?

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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?