Question 1

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

Accepted Answer

Sometimes the influence of special interests or other factors cloud the judgment of decision makers.Often the case arises where the analysis was a victim of faulty calculations of inputs or outputs.For example,there might be double counting or other problems.

Question 2

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%?

Accepted Answer

For a discount rate of 0%,the present value calculations would be $90 for project one and $100 for project two;therefore,project two is preferred.At a rate of 10%,the PV of project one is still $90.For project two,the PV is now 82.6;therefore,project one is preferred.

Question 3

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

Accepted Answer

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

Question 4

For certain intangibles that can not be measured,it is best to

Accepted Answer

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. 
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 5

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?

Accepted Answer

The rate s

Question 6

Benefits of a project

Accepted Answer

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. 
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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

Government budgets are

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Real dollar amounts are essentially the same as nominal dollars.

Accepted Answer

A) True 
 B)False

Question 13

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?

Accepted Answer

Benefit stream is 5M/1.1¹ + 1M/

Question 14

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

Accepted Answer

PV = 5,000

Question 15

Inflation favors

Accepted Answer

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

Question 16

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

Accepted Answer

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

Question 17

Money values indexed to a given period are known as

Accepted Answer

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

Question 18

The chain-reaction game

Accepted Answer

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. 
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 19

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?

Accepted Answer

The use of cost analysis can b

Question 20

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

Accepted Answer

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

Exam 8: Cost-Benefit Analysis

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

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%?

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

For certain intangibles that can not be measured,it is best to

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?

Benefits of a project

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

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.

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

Government budgets are

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

Real dollar amounts are essentially the same as nominal dollars.

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

Inflation favors

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

Money values indexed to a given period are known as

The chain-reaction game

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?

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

Introduction

Tools of Positive Analysis

Tools of Normative Analysis

Public Goods

Externalities

Political Economy

Education

The Health Care Market

Government and the Market for Health Care

Social Security

Income Redistribution: Conceptual Issues

Expenditure Programs for the Poor

Taxation and Income Distribution

Taxation and Efficiency

Efficient and Equitable Taxation

The Personal Income Tax

Personal Taxation and Behavior

The Corporation Tax

Deficit Finance

Fundamental Tax Reform: Taxes on Consumption and Wealth

Public Finance in a Federal System

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