midterm 1 prep

Question 1

Benefit

Answer 1

A benefit is any increase in an individual’s utility or the collective welfare of a a society

Question 2

cost

Answer 2

a cost is any decrease in an ind’s utility or collective welfare of a society

Question 3

what is the economic value of a good

Answer 3

sum of benefits to economic agents and we assume that the value can be given a monetary measure (ie cardinal measure)

Question 4

despite the issues associated with monetizing all values, why is it important to do so regardless?

Answer 4

it is easier to assess the benefits and costs associated with a certain action or project - serves as a foundation for objective assessment and formal decision analysis

Further, if there is anything where we are unwilling to put a monetary measure on, we can just treat it as a constraint and avoid making trade-offs regarding it

Question 5

For market goods when quantity changes are small the observed Price can often (but not always) be taken as a measure of the Value of a good. what is the exception?

Answer 5

the exception here is if the volumes being discussed are large relative to the size of the market. -need to think about the shape of the demand curve
Decisions concerned with small values imply small changes in supply or demand, these are unlikely to have significant impacts on the equilibrium market price.

Question 6

non-market goods have no observed price - cannot use the pricing mechanism to ascertain the value of these goods in conducting CBA - what are these mechanisms?

Answer 6

contingent valuation, hedonic valuation, travel cost method - these attempt to derive a simulated-demand curve for the good in question (ie what the demand curve would look like if there was a market for a good)

Question 7

what is another name for the demand curve under contingent valuation?

Answer 7

marginal social value curve

Question 8

stated preference model aka

Answer 8

contingent valuation: asking survey respondents to state their preference (asking consumers if they prefer A to B or B to A and then inferring the value they place on the good)

Question 9

revealed preference model

Answer 9

there is an active market for the good - then we can actually observe the trade-off being made rather than having it be hypothetical.

ie we know exactly how many ppl value a PS4 more than 250 - just count how many people have purchased one at this or greater than this price

Question 10

what are the three issues in contingent valuation

Answer 10

strategic bias, marginal utility and the reference position of the survey respondent, framing effects

Question 11

option value

Answer 11

valuing something you don’‘t want to use now but might want to use later

Question 12

existence value

Answer 12

valuing something you don’t and will never directly use

Question 13

what valuation method uses existing markets to value individual attributes of a good?

Answer 13

hedonic valuation

Question 14

what occurs when individuals with private information regarding risks they face choose whether to insure and how much to insure

Answer 14

adverse selection: ie high risk individuals over-insure (since their expected benefit > expected cost of insurance)

Question 15

potential solutions to adverse selection

Answer 15

group insurance, conditional insurance rates based on observable indicators, compulsory insurance

Question 16

moral hazard

Answer 16

having compulsory full insurance can affect individual behaviour and make them less risk averse - but it is important not to overlook the potential impacts of moral hazard (not to blow them up too big)

Question 17

what is risk pooling

Answer 17

as the number of insured ind increase, aggregate risk actually falls if the probabilities of outcomes are independent of each other

aka the more people in the insurance pool, the more predictable the overall payout is

Question 18

objective probabilities represent —–; subjective probabilities represent —- within diff domains of the algebra

Answer 18

risk; uncertainty

Question 19

t/f: under objective uncertainty, we can assign a single probability to each possible outcome and the probabilities are al l add up to 100%

Answer 19

TRUE: there is a given quantification of how likely various outcomes are under objective uncertainty

Question 20

exogenous variables

Answer 20

variables that are determined outside the model by the modeller and fed through the model

Question 21

endogenous variables

Answer 21

variables that are determined within the model (and responds to the shocks of the model) - these are additional facts that must change in the counterfactual to accomodate the exogenously specified change

Question 22

parameters

Answer 22

govern how endogenous variables should change - laws that are immutable to any potential future

Question 23

both io and cge represent three core elements of the economy, which are

Answer 23

final demand, factor supply, and production functions

Question 24

what is callibration

Answer 24

specifying a baseline from which economic change can be evaluated - abstract representation of the economy as it currently exists - taken from the input output tables

Question 25

leontief multiplier

Answer 25

IO model based projection of how exogenous changes in the consumption of final goods affect the demand for intermediate goods and raw factors of production

Question 26

___ models are basically just a bunch of multipliers (ratios) that relate the final demand to all of the initial inputs required to produce that final demand

Answer 26

IO model

Question 27

TF the foundations of the CGE approach are actually way older than the IO model

Answer 27

True

Question 28

IO model usage has shifted from — to —

Answer 28

used to assess the distribution of gross impacts but now have shifted to making claims about net impacts (but the form of the model still has not changed)

Question 29

what is an intermediate demand for a good

Answer 29

good is sold for further production (part of the production function of the economy)

Question 30

TF people prefer the stream of benefits that accrue earlier in project lifespan than later

Answer 30

TRUE we value current consumption more than future consumption

Question 31

why do we care about present vs future consumption when doing a CBA

Answer 31

the costs and benefits we consider in a CBA will not usually occur all at once but will be spread over several years

Question 32

— allows for a systematic comparison of costs and benefits that occur in diff time periods

Answer 32

discounting - diff from inflation adjustments

Question 33

diff between inflation and discounting

Answer 33

inflation is a change in price over time but discount rates are how the value of the good depends on how long you wait to get it

Question 34

what are the four ways to convert future payoffs into present values for cost benefit analysis

Answer 34

NPV, CBR, IRR, and terminal value

Question 35

which valuation method compares the size of total discounted benefit relative to the total discounted cost of projects

Answer 35

CB ratio

Question 36

which valuation method assumes a zero NPA and backout the discount rate that would deliver that NPV

Answer 36

Internal rate of return (IRR)

Question 37

TF when a rate is chosen, all costs and benefits should be discounted at the same rate

Answer 37

TRUE any deviation from this concept involves a really good reason

Question 38

veil of ignorance

Answer 38

putting yourself in a position where you don’t know where you willl be in society so that you don’t make decisions based on who you are

Question 39

what criteria do we try to maximize for economy as a whole?

Answer 39

construct social welfare functions (which express welfare as a function of individual utilities)

Question 40

What assumptions does the Rawlsian social welfare function make?

Answer 40

Veil of ignorance: we know all the values of utility but we don’t know which one e will have - people generally tend to be risk averse - so we choose a rule that max utility of the worst off person

Question 41

TF doing make inconsistent assumptions within a potential future

Answer 41

True- no contradictions such as using any resource twice, can’t double count costs or benefits

Hold constant any uncertainties like inflation changes, demand fluctuations, input cost fluctuations

Question 42

If we think an area of uncertainty is likely to affect the outcome of the CBA, we can do a ———- (recalculate CBA metric under diff assumptions to see if the result changes)

Answer 42

Sensitivity analysis

Question 43

General cost benefit analysis principles

Answer 43

Need to become an expert (or have access to an expert) on the subject

Need to determine/define groups for which you are doing the analysis (May or may not be your client you are doing the CBA for)

You need to understand both the net benefit of doing the project and net benefit of status quo and not doing the project

Question 44

6 initial steps in a CBA

Answer 44

1. consider ref area/group and a time frame for consideration.
2. initial cost and benefit identification
3. think about ways to simplify the elements requiring assessment
4. consider data you need to quantity cost and benefits for your data
5. decide on the other (incidental) assumptions (inflation rate, timing of C and Bs, r)
6. Use a spreadsheet analysis to find PV or other related CBA metric of the proposal or project

Question 45

TF the ability to understand and conduct decision making process is more important than communicating the specifics.

Answer 45

F: equally important

Question 46

describe the decision making context

Answer 46

decision choices could be choice of limited alternative options or a value from a continuous distribution.

continuous - optimization

discrete-optimization but also pairwise comparison

Question 47

strategic interaction becomes relevant when

Answer 47

if there are multiple decision makers and outcomes are interdependent of each other - “game theory”

Question 48

utility is a useful concept here in thinking about “a good defn of —-“

Answer 48

value but it is too abstract to practically quantify

Question 49

the market demand function gives

Answer 49

total quantity demanded by consumers at any given price

Question 50

quantity demanded

Answer 50

number of consumers with a reservation price at or above the actual price

Question 51

total consumer surplus

Answer 51

diff between the demand curve (willingness to pay) and the price to consumers of the items for only those items actually exchanged

Question 52

marginal benefit function

Answer 52

consumers willingness to pay depends on quantity they get (they might want more than 1 of something) -related to diminishing marginal utility

Question 53

summation

Answer 53

aggregating the consumers’ willingness to pay to determine a single measure of consumer surplus for entire group

Question 54

two types of summation

Answer 54

horizontal and non-rivalrous

Question 55

horizontal summation

Answer 55

rivalrous good

Question 56

vertical summation

Answer 56

non-rivalrous good