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Cost-Benefit Analysis

Description: This quiz covers the fundamental concepts, applications, and limitations of Cost-Benefit Analysis (CBA), a widely used tool in economic decision-making.
Number of Questions: 15
Created by:
Tags: economics cost-benefit analysis decision-making welfare economics
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What is the primary objective of Cost-Benefit Analysis (CBA)?

  1. To maximize profits for businesses

  2. To evaluate the overall social welfare impact of a project or policy

  3. To minimize costs without considering benefits

  4. To prioritize projects based on their political popularity

Show answer
Correct Option: B
Explanation:

CBA aims to assess the costs and benefits of a project or policy to determine its overall impact on society's well-being.

Which of the following is NOT a key step in conducting a CBA?

  1. Identifying and quantifying all relevant costs and benefits

  2. Discounting future costs and benefits to present values

  3. Considering only the direct financial impacts of the project or policy

  4. Evaluating the distributional effects of the project or policy

Show answer
Correct Option: C
Explanation:

CBA considers both direct and indirect costs and benefits, as well as the distributional effects of the project or policy.

What is the concept of 'social discount rate' used for in CBA?

  1. To adjust future costs and benefits to present values

  2. To estimate the opportunity cost of capital

  3. To determine the rate of return on investment

  4. To calculate the net present value of a project

Show answer
Correct Option: A
Explanation:

The social discount rate is used to convert future costs and benefits into present values, allowing for a meaningful comparison of costs and benefits occurring at different points in time.

Which of the following is an example of a non-market benefit that may be considered in a CBA?

  1. Increased employment opportunities

  2. Reduced air pollution

  3. Improved access to healthcare

  4. All of the above

Show answer
Correct Option: D
Explanation:

CBA considers both market and non-market benefits, including environmental improvements, social welfare enhancements, and other positive externalities.

What is the main challenge associated with assigning monetary values to non-market benefits in CBA?

  1. The lack of historical data

  2. The subjectivity of preferences

  3. The difficulty in measuring externalities

  4. All of the above

Show answer
Correct Option: D
Explanation:

Assigning monetary values to non-market benefits can be challenging due to the lack of historical data, the subjectivity of preferences, and the difficulty in measuring externalities.

What is the difference between 'cost-effectiveness analysis' and 'cost-benefit analysis'?

  1. Cost-effectiveness analysis considers only costs, while cost-benefit analysis considers both costs and benefits.

  2. Cost-effectiveness analysis compares different alternatives based on their costs per unit of benefit, while cost-benefit analysis compares costs and benefits in monetary terms.

  3. Cost-effectiveness analysis is used for public projects, while cost-benefit analysis is used for private projects.

  4. None of the above

Show answer
Correct Option: B
Explanation:

Cost-effectiveness analysis focuses on comparing different alternatives based on their costs per unit of benefit, while cost-benefit analysis compares costs and benefits in monetary terms.

Which of the following is a limitation of CBA?

  1. CBA can only be applied to public projects

  2. CBA ignores the distributional effects of a project or policy

  3. CBA is not able to capture all relevant costs and benefits

  4. All of the above

Show answer
Correct Option: D
Explanation:

CBA has limitations, including its inability to capture all relevant costs and benefits, its neglect of distributional effects, and its potential subjectivity in assigning monetary values to non-market benefits.

What is the 'willingness to pay' (WTP) concept used for in CBA?

  1. To estimate the value of non-market benefits

  2. To determine the demand for a good or service

  3. To calculate the opportunity cost of a project or policy

  4. To evaluate the distributional effects of a project or policy

Show answer
Correct Option: A
Explanation:

WTP is used in CBA to estimate the value of non-market benefits by asking individuals how much they are willing to pay for a particular improvement or to avoid a particular negative impact.

What is the difference between 'net present value' (NPV) and 'benefit-cost ratio' (BCR) in CBA?

  1. NPV is the difference between the present value of benefits and costs, while BCR is the ratio of the present value of benefits to the present value of costs.

  2. NPV is used for public projects, while BCR is used for private projects.

  3. NPV considers only market benefits, while BCR considers both market and non-market benefits.

  4. None of the above

Show answer
Correct Option: A
Explanation:

NPV is the difference between the present value of benefits and costs, while BCR is the ratio of the present value of benefits to the present value of costs.

Which of the following is NOT a common application of CBA?

  1. Evaluating the cost-effectiveness of a new drug

  2. Assessing the economic impact of a new highway project

  3. Determining the optimal level of pollution regulation

  4. Selecting the best location for a new factory

Show answer
Correct Option: D
Explanation:

CBA is commonly used to evaluate public projects and policies, not private business decisions such as selecting the best location for a new factory.

What is the concept of 'shadow pricing' used for in CBA?

  1. To adjust market prices to reflect social costs and benefits

  2. To estimate the opportunity cost of resources

  3. To calculate the net present value of a project

  4. To evaluate the distributional effects of a project or policy

Show answer
Correct Option: A
Explanation:

Shadow pricing is used in CBA to adjust market prices to reflect social costs and benefits, particularly when market prices do not accurately reflect the true value of resources or externalities.

Which of the following is an example of a distributional effect that may be considered in a CBA?

  1. The impact of a project on employment opportunities in different regions

  2. The impact of a project on income inequality

  3. The impact of a project on the environment

  4. All of the above

Show answer
Correct Option: D
Explanation:

CBA considers distributional effects, including the impact of a project or policy on employment opportunities, income inequality, and the environment.

What is the main challenge associated with conducting a CBA for a project with long-term impacts?

  1. The difficulty in predicting future costs and benefits

  2. The subjectivity of preferences

  3. The lack of historical data

  4. All of the above

Show answer
Correct Option: D
Explanation:

Conducting a CBA for a project with long-term impacts is challenging due to the difficulty in predicting future costs and benefits, the subjectivity of preferences, and the lack of historical data.

Which of the following is NOT a common sensitivity analysis technique used in CBA?

  1. Changing the discount rate

  2. Varying the assumptions about future costs and benefits

  3. Considering different scenarios

  4. Ignoring the distributional effects of the project or policy

Show answer
Correct Option: D
Explanation:

Sensitivity analysis in CBA involves varying assumptions and parameters to assess the robustness of the results. Ignoring the distributional effects of the project or policy is not a common sensitivity analysis technique.

What is the main purpose of conducting a CBA for a public project?

  1. To maximize profits for the government

  2. To evaluate the overall social welfare impact of the project

  3. To minimize costs without considering benefits

  4. To prioritize projects based on their political popularity

Show answer
Correct Option: B
Explanation:

The primary objective of a CBA for a public project is to assess its overall social welfare impact, considering both costs and benefits.

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