Chapter 6 Test Bank Docx Benefit-Cost Analysis

Chapter 6 Multiple Choice Questions

Consider the three following plans under consideration to provide water to a town.

Plan A

$4 million in construction costs

$2 million in maintenance costs

$8 million worth of clean water provided

Plan B

$10 million in construction costs

$3 million in maintenance costs

$16 million worth of clean water provided

Plan C

$2 million in construction costs

$0.5 million in maintenance costs

$5 million worth of clean water provided

1. Using the net benefits formula, which of the above policies should be chosen?

a. Plan A

b. Plan B

c. Plan C

2. Which of the above plans should be adopted using the Benefit/Cost Ratio?

a. Plan A

b. Plan B

c. Plan C

3. Which of the above plans should be adopted using the percentage rate of return?

a. Plan A

b. Plan B

c. Plan C

Suppose you work for a small city that possesses a large fairgrounds. There is a weekend several months from now with no planned activity at the fairgrounds. You have asset budget of $5 million and you must choose from among the following events which could be hosted there. Assume for the sake of simplicity that more than one event can take place that weekend so long as you remain within your budget constraint. However, the same event cannot take place twice.

Event Total Costs Total Benefits

County Fair $5 million $8 million

Adult Obstacle Course $1 million $2.5 million

Car Show $2.5 million $5 million

Dirt Bike Race $4 million $6.5 million

Music Festival $2 million $3 million

4. Using net benefits formula, which of the events above should be chosen?

a. County Fair

b. Dirt Bike Race & Adult Obstacle Course

c. Car Show & Adult Obstacle Course

d. Music Festival & Car Show

5. Which events should be chosen using the benefit/cost ratio (Choosing the projects with the highest ratio first)?

a. County Fair

b. Dirt Bike Race & Adult Obstacle Course

c. Car Show and Adult Obstacle Course

d. Music Festival & Car Show

6. What is the Percentage Rate of Return on the Fair?

a. 160%

b. 60%

c. 62.5%

d. 162.5%

Suppose a new power plant meant to provide power to a metropolitan area is to be constructed and its power must go to urban and suburban areas. Suppose marginal cost is (1/6)Q and the marginal beneftis for urban areas is MB_U=1400-Q_U and marginal benefits for suburban areas is MB_S=2,000-(1/2)Q_S.

7. What is the total quantity of electricity that should be produced?

a. 3,600

b. 4,000

c. 2,800

d. 3,400

8. Use the total found above to find the marginal cost at this quantity for the metropolitan area as a whole. Then use the marginal benefit equations to see how much energy the Urban Area and suburban area should get.

a. Urban 1,000, Suburban 1,000

b. Urban 2,000, Suburban 1,800

c. Urban 2,000, Suburban 1,400

d. Urban 800, Suburban 2,800

9. A cost effectiveness ratio is

a. total effect/total cost

b. total cost/total non-monetary effect

c. total benefits/total cost

d. net benefits/total cost

10. One issue with cost effectiveness analysis under non-ideal conditions is

a. taxes tend to complicate the selection

b. the total benefits are usually understated

c. sometimes policies have unequal effects or costs

d. the results are often wildly inaccurate