1. A worker values her leisure at $7 per hour. If she is unemployed she receives $9
per hour in unemployment benefits. If she is hired to work on a public project
she will be paid $18 per hour (and will forfeit her unemployment benefit). What
is:
a. The social opportunity cost of an hour of her time (the cost which would be
entered in an efficiency benefit-cost analysis)? [1 mark]
b. The private opportunity cost of an hour of her time (the wage she would
have to be paid to induce her to accept a job)? [1 mark]
c. The total employment benefit per hour that would be entered in the
referent group net benefit account if she was employed on a public
project? [1 mark]
d. The division of the hourly employment benefit between the worker and the
government? [2 marks]
2. A foreign firm is considering a project in a developing country which has, at
market prices and before tax, a present value of benefits of $1,450 and a
present value of input costs of $955. If the project goes ahead, the firm would
pay tax of $97 (present value) to the developing country!¡¥s government. The
project would employ domestic labour which would otherwise be unemployed
and pay them wage with a present value of $715 (the wage bill is included in
the $955 input costs referred to above). The opportunity cost of unemployed
labour is 75% of the market wage. The project will create both negative
(pollution) and positive externalities (accumulation of new labour skills) to the
economy, which have present values of 345 and 128, respectively.
Assuming that the owners of the foreign firm are not part of the referent group,
what are the net present values generated by:
a. The project benefit-cost analysis; [1 mark]
b. The private benefit-cost analysis; [1 mark]
c. The efficiency benefit-cost analysis; [1 mark]
d. The aggregate referent group benefit-cost analysis; [1 mark]
1. To calculate the answers, we need to understand the different costs and benefits involved and how they are measured.
a. The social opportunity cost of an hour of her time is the value of the next best alternative foregone. In this case, if the worker is unemployed, she receives $9 per hour in unemployment benefits. Therefore, the social opportunity cost of her time is $9 per hour.
b. The private opportunity cost of an hour of her time is the wage she would have to be paid to accept a job. In this case, if she is hired to work on a public project, she will be paid $18 per hour. Therefore, the private opportunity cost of her time is $18 per hour.
c. The total employment benefit per hour that would be entered in the referent group net benefit account if she was employed on a public project includes both the wage she receives and the unemployment benefits she forfeits. So it would be $18 (hourly wage) + $9 (unemployment benefits) = $27 per hour.
d. The division of the hourly employment benefit between the worker and the government would depend on the specific policies and agreements in place. Without more information, it's not possible to determine the exact division mentioned in the question.
2. Similar to the previous question, to calculate the net present values, we need to understand the different costs and benefits involved.
a. The project benefit-cost analysis calculates the net present value by subtracting the present value of input costs from the present value of benefits. In this case, the net present value would be $1,450 (benefits) - $955 (input costs) = $495.
b. The private benefit-cost analysis considers the perspective of the foreign firm. It calculates the net present value by subtracting the tax paid to the developing country's government from the present value of benefits, ignoring externalities. In this case, the net present value would be $1,450 (benefits) - $97 (tax) = $1,353.
c. The efficiency benefit-cost analysis takes into account both the positive externalities (accumulation of new labor skills) and negative externalities (pollution) to the economy. It calculates the net present value by subtracting the present value of input costs, including the opportunity cost of unemployed labor, from the present value of benefits, including the positive externalities and adjusting for the negative externality. In this case, the net present value would be $1,450 (benefits) - $955 (input costs) - $345 (negative externality) + $128 (positive externality) = $278.
d. The aggregate referent group benefit-cost analysis would consider the benefits and costs to the entire referent group, which could include various stakeholders such as the local community, government, and workers. Without more information on how the referent group is defined and the specific weights assigned to different stakeholders, it's not possible to accurately calculate the net present value in this scenario.