Chapter 3: Cost–Benefit Analysis
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Cost-benefit analysis is 1)
A) a set of practical procedures for guiding public expenditure decisions.
B) impossible since benefits and costs are hard to evaluate.
C) used by only the private sector to determine whether certain projects should be undertaken.
D) all of these answer options are correct.
2) The rate at which future money must be discounted is known as the 2)
A) discount rate. B) exposure rate.
C) rate of inflation. D) time rate.
3) The value of a human life 3)
A) can be estimated using probability of death.
B) is an intangible that is hard to value.
C) can be estimated by lost earnings.
D) all of these answer options are correct.
4) The value that society places on consumption that is sacrificed in the present is called 4)
A) social returns. B) social marginal damages.
C) social marginal costs. D) social rate of discount.
5) Risk is a part of cost-benefit analysis. 5)
A) decided by others whether to be B) never
C) always D) unable to be calculated as
6) Money values indexed to a given period are known as 6)
A) real. B) inverse. C) random. D) nominal.
7) The term "future value" 7)
A) refers to the present value of future money.
B) can be determined by inverting the formula for present value.
C) is not used in modern public finance analysis.
D) includes the shadow prices of all goods used in a project.
8) For certain intangibles that cannot be measured, it is best to 8)
A) exclude them from cost benefit analysis, and then calculate how large they must be to reverse the decision.
B) leave it to the private sector to decide on value.
C) guess.
D) reevaluate using the Hicks-Kaldor criterion.
9) The chain-reaction game 9)
A) counts secondary costs without counting secondary benefits.
B) compounds a bad decision by making more bad decisions, causing unwanted projects to get funded.
C) counts secondary benefits without counting secondary loses.
D) was cancelled on network TV.
10) For a government to be efficient, a project should be funded 10)
A) until the marginal benefit equals the marginal cost.
B) as long as the marginal cost exceeds the marginal benefit.
C) only when the marginal benefit exceeds the marginal cost.
, D) only when the marginal cost exceeds the marginal benefit.
11) As long as net returns are positive, the gainers could compensate the losers and still enjoy a net increase in
utility. This notion is called 11)
A) a potential Pareto improvement. B) the Hicks-Kaldor criterion.
C) both of these answers are correct. D) neither of these answers is correct.
12) Inflation favours 12)
A) borrowers. B) lenders.
C) neither borrowers nor lenders. D) both borrowers and lenders.
13) Evaluating of costs and benefits is likely to require 13)
A) only observed prices.
B) ad hoc assumptions.
C) only economists as they possess all the technical expertise required.
D) a PhD in economics.
14) When wages are viewed as benefits instead of costs of a project, it is an example of the 14)
A) double-counting game. B) chain-reaction game.
C) dating game. D) labour game.
15) Internal rate of return analysis suggests that a project should be undertaken if 15)
A) MB > 0. B) IRR > discount rate.
C) discount rate > inflation rate. D) NPV > 0.
16) Real dollar amounts are essentially the same as nominal dollar amounts. 16)
A) True B) False C) Uncertain
17) When the benefit-cost ratio of a project is greater than 1, the project should be considered. 17)
A) True B) False C) Uncertain
18) The term "present value" refers to the future value of present day money. 18)
A) True B) False C) Uncertain
19) When the benefits or costs of a project are risky, they must be avoided.19)
A) True B) False C) Uncertain
20) Refer to the figure below. If the supply curve returns to its initial level of Sa, the amount of consumer
surplus will return to its original level.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Cost-benefit analysis is 1)
A) a set of practical procedures for guiding public expenditure decisions.
B) impossible since benefits and costs are hard to evaluate.
C) used by only the private sector to determine whether certain projects should be undertaken.
D) all of these answer options are correct.
2) The rate at which future money must be discounted is known as the 2)
A) discount rate. B) exposure rate.
C) rate of inflation. D) time rate.
3) The value of a human life 3)
A) can be estimated using probability of death.
B) is an intangible that is hard to value.
C) can be estimated by lost earnings.
D) all of these answer options are correct.
4) The value that society places on consumption that is sacrificed in the present is called 4)
A) social returns. B) social marginal damages.
C) social marginal costs. D) social rate of discount.
5) Risk is a part of cost-benefit analysis. 5)
A) decided by others whether to be B) never
C) always D) unable to be calculated as
6) Money values indexed to a given period are known as 6)
A) real. B) inverse. C) random. D) nominal.
7) The term "future value" 7)
A) refers to the present value of future money.
B) can be determined by inverting the formula for present value.
C) is not used in modern public finance analysis.
D) includes the shadow prices of all goods used in a project.
8) For certain intangibles that cannot be measured, it is best to 8)
A) exclude them from cost benefit analysis, and then calculate how large they must be to reverse the decision.
B) leave it to the private sector to decide on value.
C) guess.
D) reevaluate using the Hicks-Kaldor criterion.
9) The chain-reaction game 9)
A) counts secondary costs without counting secondary benefits.
B) compounds a bad decision by making more bad decisions, causing unwanted projects to get funded.
C) counts secondary benefits without counting secondary loses.
D) was cancelled on network TV.
10) For a government to be efficient, a project should be funded 10)
A) until the marginal benefit equals the marginal cost.
B) as long as the marginal cost exceeds the marginal benefit.
C) only when the marginal benefit exceeds the marginal cost.
, D) only when the marginal cost exceeds the marginal benefit.
11) As long as net returns are positive, the gainers could compensate the losers and still enjoy a net increase in
utility. This notion is called 11)
A) a potential Pareto improvement. B) the Hicks-Kaldor criterion.
C) both of these answers are correct. D) neither of these answers is correct.
12) Inflation favours 12)
A) borrowers. B) lenders.
C) neither borrowers nor lenders. D) both borrowers and lenders.
13) Evaluating of costs and benefits is likely to require 13)
A) only observed prices.
B) ad hoc assumptions.
C) only economists as they possess all the technical expertise required.
D) a PhD in economics.
14) When wages are viewed as benefits instead of costs of a project, it is an example of the 14)
A) double-counting game. B) chain-reaction game.
C) dating game. D) labour game.
15) Internal rate of return analysis suggests that a project should be undertaken if 15)
A) MB > 0. B) IRR > discount rate.
C) discount rate > inflation rate. D) NPV > 0.
16) Real dollar amounts are essentially the same as nominal dollar amounts. 16)
A) True B) False C) Uncertain
17) When the benefit-cost ratio of a project is greater than 1, the project should be considered. 17)
A) True B) False C) Uncertain
18) The term "present value" refers to the future value of present day money. 18)
A) True B) False C) Uncertain
19) When the benefits or costs of a project are risky, they must be avoided.19)
A) True B) False C) Uncertain
20) Refer to the figure below. If the supply curve returns to its initial level of Sa, the amount of consumer
surplus will return to its original level.
