Reference no: EM132208306

Question: 1. You live in a city that currently does not require bicycle riders to wear helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a helmet.

(a) From your perspective, what are the major costs and benefits of a proposed city ordinance that would require all bicycle riders to wear helmets?

(b) What are the categories of costs and benefits from society's perspective?

2. Consider two projects, A and B. Project A has a capital cost of M100 million and Project B has a capital cost of M20 million. Given an opportunity cost of capital of 7 per cent, Project A provides a NPV of M30 million while Project B provides a NPV of M10 million. Explain why Project A is better than Project although it costs five times as much and produces only three times the benefit.

3. Suppose that the government is debating whether to spend M100 billion today to address climate change. It is estimated that M700 billion of damage will be averted, but these benefits will accrue 100 years from now. A critic of the proposal says that it would be far better to invest M100 billion, earning an average real return of 3 percent per year, and then use the proceeds in 100 years to repair the damage from climate change. Is this critic correct?

4. Suppose that you are planning to take a year vacation to bike across your country. Someone is willing to sell you a new bicycle for M500. At the end of the year, you expect to resell the bicycle for M350. The benefit to you of using the bicycle is the equivalent of M170.

(a) What is the internal rate of return?

(b) If the discount rate is 5 percent, should you buy the bicycle?

5. The effects of a tariff on imported peaches can be divided into the following categories: tariff revenues received by the treasury (M8million), increased use of the resources to produce more peaches domestically (M6 million), the value of reduced consumption by domestic consumers (M13 million), and increased profits received by domestic peach growers (M4 million).

2A CBA from the national perspective would find costs of the tariff equal to M19 million [being the sum of costs of increased domestic production (M6 million) and forgone domestic consumption (M13 million)]. The increased profits received by domestic peach growers and the tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers on the peaches that they continue to consume and hence, count as neither benefits nor costs. Thus, the net benefits of the tariff are negative (-M19 million). Consequently, the CBA would recommend against adoption of the tariff.

(a) Assuming the Agriculture Department views peach growers as its primary constituency, how would it calculate net benefits if it behaves as if it is a spender?

(b) Assuming the Treasury Department behaves as if it is a guardian, how would it calculate net benefits if it believes that domestic growers pay profit taxes at an average rate of 20 percent?