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University of Colorado at Boulder, Summer 1999, Environmental Economics, Econ 3545

Exam 2



There are 30 multiple choice questions in this test, each worth one point. Attempt all questions.



  • Benefit-cost analysis should adopt ___________ in evaluating benefits and costs of a public project.
  • private perspective
  • social perspective
  • a or b above, as both perspectives lead to the same estimates.
  • none of the above perspectives
    •
  • A benefit-cost analysis of a project shows its benefit-cost ratio to be 0.80.
  • According to this ratio, the project should not be implemented.
  • According to this ratio, the project should be implemented.
  • The ratio implies that net benefits of the project at least exceed zero.
  • The ratio conveys no important information.
  • Conversion of future benefits (or future costs) to their present values is called
  • sensitivity analysis.
  • compounding.
  • discounting.
  • contingent valuation.
  • Comparison of net benefits of a project at different discount rates is called
  • sensitivity analysis.
  • compounding.
  • discounting.
  • contingent valuation.
  • Which is the discount factor to calculate present value of an amount expected n years from now and discounted at a rate r% per year?
  • (1+r)n
  • 1+(1+r)n
  • 1/(1+r)n
  • None of the above
    •
  • What is the present value of $121 expected two years from today at a discount rate of 10% per year?
  • $100
  • $110
  • $120
  • $121
  • Circle the correct/best statement.
  • A benefit of the same magnitude coming farther in the future has a smaller present value.
  • Present value of a future benefit is smaller with a higher discount rate.
  • Both statements are true.
  • Both statements are false.
  • According to the time preference approach, the discount rate should be chosen equal to
  • the average interest rate banks pay to savings account depositors.
  • the average interest rate banks charge to business borrowers.
  • the rate prescribed by the Office of Management and Budget.
  • none of the above.
  • Real interest rate is
  • the interest rate quoted by banks to depositors and borrowers.
  • the nominal interest rate minus the inflation rate.
  • the nominal interest rate plus the inflation rate.
  • equal to the nominal interest rate.
  • An evaluator estimates benefits and costs of a project at constant prices. She also finds the average nominal interest rate charged by banks to business borrowers. Should she use this nominal rate as the discount rate or convert it to real rate by deducting expected inflation rate?
  • Use nominal rate.
  • Use real rate.
  • It does not matter.
  • It depends who she is working for.
  • Which best describes the decision criterion for implementing a project?
  • Benefits of the project should at least exceed its costs.
  • Net benefits of the project should at least exceed zero.
  • Benefit-cost ratio of the project should at least exceed one.
  • Any one of the above is a decision criterion, as one implies the other.
  • Which criterion is appropriate for comparing alternative scopes (sizes) of a project?
  • Net benefits of alternative scopes
  • Benefit-cost ratios of alternative scopes
  • Any one of the above
  • None of the above
    •
  • The table below compares two alternative scopes of a project. Which scope of the project would you prefer for efficiency reason?
    • Description Scope A Scope B
    Total net benefits $10,000 $13,000
    Net benefits to poor (as % of their income) $3,000 (10%) $4,000 (13.3%)
    Net benefits to rich (as % of their income) $7,000 (10%) $9,000 (12.8%)
    Benefit-cost ratio 1.5:1 1.3:1
  • Scope A
  • Scope B
  • Both are equally good.
  • None
  • The above table shows distribution of net benefits across income groups. Which statement correctly characterizes distribution?
  • Scope A has progressive distribution of net benefits.
  • Scope B has regressive distribution of net benefits.
  • Scope B has proportional distribution of net benefits.
  • Scope A has proportional distribution of net benefits.
  • Which statement best describes a conservationist's dilemma regarding discounting of future benefits and costs of an environmental project?
  • A low discount rate may enable a project to pass benefit-cost test even when the project causes large initial environmental costs but generates small amounts of benefits over many years.
  • A high discount rate may enable a project to pass benefit-cost test even when the project causes large environmental costs in future but generates immediate short-term benefits.
  • Both statements together describe a conservationist's dilemma.
  • Both statements do not describe a conservationist's dilemma.
    •
  • A person who compares expected values of risky outcomes and is indifferent between two games with the same expected value is considered
  • risk averse.
  • risk neutral.
  • risk seeker.
  • none of the above.
    •
  • Consider an environmental resource that has both use and nonuse values. An injury to this resource has adverse effect on human health. Three different estimates of benefits of restoring original quality of this injured resource have been obtained from three techniques -- direct damage approach, an indirect method of estimating willingness to pay, and contingent valuation method. Use your theoretical knowledge to arrange the three estimates in the descending order of magnitude (from the highest to the lowest estimate).
  • Direct damage estimate, indirect willingness to pay estimate, and contingent valuation estimate.
  • Indirect willingness to pay estimate, contingent valuation estimate, and direct damage estimate.
  • Contingent valuation estimate, direct damage estimate, and indirect willingness to pay estimate.
  • Contingent valuation estimate, indirect willingness to pay estimate, and direct damage estimate.
  • Health damages may have five consequences: (i) an increase in preventive expenditures of households to prevent further decline in health of family members, (ii) an increase in pain and suffering from health damage, (iii) an increase in medical expenditures to cure health problems, (iv) loss of work or school days due to sickness, and (v) loss of potential income from premature death of family members. Direct health damage approach of estimating benefits is the sum of dollar values of
  • (i)+(ii)+(iii)+(iv)+(v).
  • (ii)+(iii)+(iv)+(v).
  • (iii)+(iv)+(v).
  • (iv)+(v).
  • In 1998, net income (sales revenue remaining after paying for costs) of an apple orchard was $100,000. The orchard's net income would have increased to $125,000 in 1999 if a new government regulation was not enforced that year. The regulation increased the cost of insecticide spraying and resulted into an actual net income of $115,000 in 1999. Assuming no divergence between private costs and social costs, what is the cost of the new regulation?
  • $10,000
  • $15,000
  • $20,000
  • $25,000
  • Willingness to pay for reducing pollution can be estimated from
  • additional wages offered for similar jobs at more polluted workplaces.
  • additional property values offered for similar properties at less polluted locations.
  • both of the above.
  • none of the above.
  • Circle the correct/best statement.
  • Direct damages approach does not include pain and suffering avoided in estimating benefits of reducing health damages.
  • Indirect methods of estimating willingness to pay include pain and suffering avoided, but they do not measure nonuse values of environmental resources.
  • Contingent valuation method measures both use and nonuse values of environmental resources.
  • All of the above statements are correct.
  • Which is not a potential problem/difficulty associated with the contingent valuation method?
  • Precise explanation of environmental attribute being valued
  • Possibility of respondents ignoring income constraint and ignoring availability of substitutes of goods being valued
  • Possibility of respondents misstating their willingness to pay
  • Inappropriate for estimating nonuse value of resources
  • In a contingent valuation survey, high nonresponse rate is more likely with
  • personal interview.
  • phone interview.
  • mail interview.
  • focus group interview.
  • Which technique is least prone to nonresponse and extreme valued response to willingness to pay question?
  • Open-ended question
  • Bidding game
  • Printed payment cards
  • Referendum technique
  • Which is the best method of estimating cost of a pollution regulation?
  • Increase in the cost of a polluting firm in a year after the implementation of the regulation, compared to the cost in a year before the implementation of the regulation
  • Increase in the cost of a polluting firm in a year when the regulation is in force, compared to the cost that would have been incurred in that year if the regulation was not enforced
  • Both a and b would correctly estimate cost of a regulation.
  • Both a and b would not correctly estimate cost of a regulation.
  • Government announces a new pollution regulation and grants interest subsidy to firms to install pollution control devices by borrowing, if necessary. Government also waives sales tax to firms on purchase of pollution control devices. Consequently, sales tax and interest cost on such borrowing are zero to the regulated firms. In spite of the waiver and subsidy, should an economist include sales tax and interest cost in the cost of the regulation?
  • Include both sales tax and interest cost.
  • Include sales tax, but exclude interest cost.
  • Include interest cost, but exclude sales tax.
  • Exclude both sales tax and interest cost.
  • A firm closes its operations because losses would have been higher if it has to comply with a recently enforced regulation. Consequently, 50 workers have been laid off from the firm. Would you include the loss of jobs in the cost of regulation?
  • Do not include loss of jobs as a cost of regulation, if the laid-off workers are likely to find alternative employment.
  • Include loss of jobs as a cost of regulation, even if the laid-off workers are likely to find alternative employment.
  • Include moving expenses and/or retraining expenses as a cost of regulation, if that is what it takes for the laid-off workers to find alternative employment.
  • Do a and c.
  • Representative firm approach of estimating cost of a regulation is
  • to select a firm that is similar to many other firms in size and technology.
  • to elect a firm by majority voting of member firms in an industry.
  • both a and b.
  • none of the above.
  • Horizontal equity
  • is the comparison of distribution of net benefits of a project among people of similar socio-economic group, for example distribution among poor.
  • is the comparison of distribution of net benefits of a project across people of different socio-economic groups, for example distribution between rich and poor.
  • implies equal distribution of net benefits to every one in the society.
  • is none of the above.
  • Appropriate risk preference approach to evaluate policies associated with risks of disastrous and irreversible damage to environment and human health is
  • risk neutrality.
  • risk averseness.
  • risk seeking.
  • any of the above.

    • Answer Key

    1b 2a 3c 4a 5c 6a 7c 8a 9b 10b 11d 12a 13b 14d 15c
    16b 17d 18c 19a 20c 21d 22d 23c 24d 25b 26c 27d 28a 29a 30b