Economic Economic Analysis of

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Economic Analysis of Social Issues (Grant)

Chapter 2 Cost-Benefit Analysis and the Value of a Life

2.1 Cost-Benefit Analysis

1) The primary method that decision makers use to evaluate choices among competing

alternatives is called

A) the competitive forces model.

B) cost-benefit analysis.

C) heads-or-tails analysis.

D) absolute advantage.

Answer: B

Diff: 1 Page Ref: 37

Topic: Cost-Benefit Analysis

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

2) Cost-benefit analysis is a tool that is used

A) only by businesses.

B) only by individuals and businesses.

C) only by governments.

D) by individuals, businesses, and governments.

Answer: D

Diff: 1 Page Ref: 37

Topic: Cost-Benefit Analysis

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

3) You are trying to decide if you should take a day off from work to go to a casino. In making

your decision, you compare what you would sacrifice to go to the casino (lost wages for the day,

potential losses at the casino, the amount of work you will have to make up, etc.) with the

enjoyment you would receive from the day off (relaxation, potential winnings, etc.). The analysis

you have just conducted is called

A) cost-benefit analysis.

B) comparative advantage analysis.

C) stress analysis.

D) sacrificial-wage analysis.

Answer: A

Diff: 1 Page Ref: 37

Topic: Cost-Benefit Analysis

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

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4) You are trying to decide if you should take a vacation. Your cost-benefit analysis indicates

that the benefits outweigh the costs. You should

A) take a vacation.

B) not take a vacation.

C) take a vacation only if you have enough cash saved up to pay for it up front.

D) More information is needed to make this decision.

Answer: A

Diff: 1 Page Ref: 37

Topic: Cost-Benefit Analysis

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

5) Claudia’s Copy Shop is deciding which 3-D printer to purchase, and it only has room for one

printer. It can purchase the “Mini-Me” small-object printer, which would generate benefits of

$50,000 at a cost of $5,000, or it can purchase the “Gargantuan” large-object printer which

would generate benefits of $250,000 at a cost of $25,000. Based on these numbers, Claudia’s

Copy Shop should purchase

A) the “Mini-Me” printer.

B) the “Gargantuan” printer.

C) either printer, since the cost of each is exactly 10 percent of the benefit from each.

D) neither printer, since the cost of each is too high for a 3-D printer.

Answer: B

Diff: 2 Page Ref: 38

Topic: Using Cost-Benefit Analysis to Select Among Competing Alternatives

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Analytic thinking

6) Gerald is deciding what kind of light bulbs to install in the light fixtures in his new home. He

has it narrowed down to compact fluorescent bulbs (CFLs) or LED bulbs. The CFLs will cost

$350 and the LEDs will cost $900. Gerald estimates that the energy-saving benefits from the

CFLs will be $750 and the energy-saving benefits from the LEDs will be $1,250. Based on these

numbers, Gerald should purchase the

A) CFLs because the cost is cheaper.

B) CFLs because the the net benefit is greater.

C) LEDs because the benefit is greater.

D) LEDs because the net benefit is greater.

Answer: B

Diff: 2 Page Ref: 38

Topic: Using Cost-Benefit Analysis to Select Among Competing Alternatives

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Analytic thinking

3

7) Marginal cost refers to the ________ cost incurred when choosing a particular action.

A) total

B) net

C) implicit

D) additional

Answer: D

Diff: 1 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

8) The additional benefit incurred when undertaking an activity is the ________ benefit.

A) total

B) gross

C) marginal

D) explicit

Answer: C

Diff: 1 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

9) Bruno makes tamales to sell at the local farmer’s market, and each month he sells all he

makes. Each month, tamales had been selling for $10 per dozen and Bruno made 80 dozen

tamales at a total cost of $500. It costs Bruno $100 to rent a booth at the farmer’s market. This

month, as Bruno is getting ready to pay management the $100 booth rental fee and display his

tamales, he discovers that he will need to cut his price to $5 per dozen to compete with other

tamale sellers. Bruno should

A) not pay the booth rental fee and not set up his booth because he has already spent $500 to

make his tamales and will only receive $400 by selling them.

B) only set up his booth if he does not have to pay the booth rental fee because then he will at

least break even.

C) go ahead and pay the fee and set up his booth because the marginal benefit of selling his

tamales is $400 and the marginal cost is $100.

D) not set up his booth this month because the marginal benefit of selling his tamales is $400 and

the marginal cost is $600.

Answer: C

Diff: 3 Page Ref: 38-39

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Analytic thinking

4

10) The cost-benefit analysis on the financial impact smokers have on society conducted by

Vanderbilt professor Kip Viscusi concludes that

A) smokers provide a net public service to society.

B) smokers are a financial drain on society.

C) smokers contribute less to retirement and pension programs than they receive from those

programs.

D) smokers account for about 32 cents of net cost to everyone else in society for every pack of

cigarettes smoked.

Answer: A

Diff: 1 Page Ref: 39

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Application of knowledge

Special Feature: Application 2.1: Cost-Benefit Analysis and the Tobacco Settlement

11) ________ should be considered when conducting a cost-benefit analysis.

A) Total costs and total benefits

B) Only marginal costs and marginal benefits

C) Only implicit costs and implicit benefits

D) All costs and all benefits

Answer: B

Diff: 1 Page Ref: 40

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Application of knowledge

12) When conducting cost-benefit analysis, it is important to ignore previously incurred costs

and previously received benefits.

Answer: TRUE

Diff: 2 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

13) Arriving at a decision by comparing total costs and total benefits is called marginal analysis.

Answer: FALSE

Diff: 1 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Application of knowledge

5

14) An activity should be undertaken if the marginal benefit of the activity is greater than the

marginal cost of the activity.

Answer: TRUE

Diff: 1 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Application of knowledge

15) The additional costs you expect to incur if you undertake an activity and the additional

benefits you expect to receive if you undertake an activity are called ________ costs and benefits

Answer: marginal

Diff: 1 Page Ref: 38

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Application of knowledge

16) Lucinda is deciding whether to enroll in an art school or a culinary school. The art school

will cost $38,000 and the culinary school will cost $52,000. Lucinda estimates that the benefits

from attending the art school will be $75,000 and the benefits from attending the culinary school

will be $88,000. Based on these numbers, in which school should Lucinda enroll?

Answer: The net benefit from attending the art school is $75,000 – $38,000 = $37,000. The net

benefit from attending the culinary school is $88,000 – $52,000 = $36,000. So, even though the

total benefit is greater from attending the culinary school, the net benefit is greater from

attending the art school, so she should attend the art school.

Diff: 3 Page Ref: 38

Topic: Using Cost-Benefit Analysis to Select Among Competing Alternatives

Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to

think like an economist.

AACSB : Analytic thinking

6

17) Salvador grows orchids to sell to local florists. When Salvador began raising his current crop

of 1,000 orchids, he could sell them for $20 per plant, and he incurred shipping costs of $3 per

plant. His cost of raising orchids is $8 per plant. When his crop was ready to ship, florists were

only paying $9 per plant. Use marginal analysis to determine Salvador’s best course of action

given the drop in the price of orchids.

Answer: When Salvador began raising his current crop of orchids, he expected to earn revenue

of $20,000 and incur costs of $8,000 for raising the plants and an additional $3,000 for shipping,

leaving him with a net (marginal) benefit of $9,000. With the drop in price, his revenue will be

$9,000 and his costs will be $11,000, leaving him with a loss of $2,000. Although it may seem as

though the best option for Salvador is to not sell his orchids at this lower price, the $8,000 cost of

raising the orchids has already been incurred, so if he chooses to not sell the orchids, he will lose

$8,000. If he chooses to sell his orchids, his net loss will only be $2,000. So by selling the

orchids, Salvador’s marginal benefit is $9,000 and his marginal cost is the $3,000 shipping

expense. His best course of action is to sell the orchids, even at the lower price.

Diff: 3 Page Ref: 38-39

Topic: Evaluating Alternatives at the Margin

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Analytic thinking

2.2 Applying Cost-Benefit Analysis to Life

1) In the case of the Ford Pinto, Ford decided that

A) it would be cheaper to pay damages to families involved in crashes than to fix the problems

with the Pinto.

B) it would be more expensive to pay damages to families involved in crashes than to fix the

problems with the Pinto.

C) the problems with the Pinto could not be easily or cheaply fixed.

D) it would not be held liable for damages caused by the Pinto and therefore had no reason to fix

them.

Answer: A

Diff: 1 Page Ref: 40

Topic: Corporations Do It: The Ford Pinto

Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and

present value to make decisions.

AACSB : Application of knowledge

2) ________ regularly trade their own gain against others’ lives.

A) Corporations

B) Governments

C) Individual people

D) all of the above