# Finance & Cost Benefit Analysis

1. Bill and Lisa are the only two consumers on a desert island. Bill has 40 bananas and Lisa has 40 Twinkies.

a. Is the current allocation efficient? If not, use an Edgeworth box to demonstrate why.

b. Assume Bill trades 10 bananas for 10 of Lisa’s Twinkies. How do I know this trade improves overall welfare?

c. Now, assume Bill takes all of Lisa’s supplies by force. Is the resulting allocation efficient? Why or why not?

2. Compare and contrast the utilitarian and Rawlsian viewpoints on social welfare.

3. List the five qualities of social welfare functions that the Arrow Impossibility Theorem implies can’t coexist.

4. Demand for vinyl records is given by P = 10,000 – 10 Q. If the initial price is $5 per record, and a policy change lowers that price to $3, how much does consumer surplus change? Is this an increase or decrease in consumer surplus?

5. Describe the difference between equivalent variation and compensating variation.

6. Describe how you might estimate the change in consumer surplus for a price decrease due to a real world policy.

7. What is the equation for a simple linear regression model? How do we choose the parameters of this model to optimize that equation? What is the difference between simple regression and multiple regression?

8. List and briefly describe three types of revealed preference methods. Give an example of one.

9. A residential developer is planning a neighborhood and is trying to make a decision whether or not to install underground power lines as opposed to above ground power lines. How would you conduct a revealed preference study to determine how much people value underground utilities?

10. Assume you are collecting data to use in a travel cost estimate of the value of water quality in local rivers popular with trout fishers. What variables would you collect data for?

11. What are some limitations to the use of travel cost methods?

12. Briefly discuss the literature on using happiness to evaluate economic outcomes. In your opinion, is this a good research plan to use?

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