Cost-Benefit Analysis

Day 3 Session 1: Group Presentations 3b. For each of the eight cases indicated in the following diagram, state whether you Chapter 5 - Cost-benefit analysis and economic efficiency: Questions would use the demand curve or the supply curve to determine the appropriate price for valuation purposes in an efficiency benefit-cost analysis, and state whether the appropriate price is gross or net of the tax or subsidy. In each case briefly justify your 1. Draw an upward sloping supply curve and a downward sloping demand curve for answer. labour. Label the axes. Assuming that the labour market is distorted by a minimum wage (which is a binding constraint), draw in the level of the minimum wage, labelled Wm, and identify the quantity of labour demanded, labelled Q. On the supply curve of Subsidy labour, identify the level of the wage corresponding to Q units of labour supplied, and Item to be valued Distorting | Corrective label it Wa- Project Output Satisfies additional demand (iii) (iv) (i) state what the efficiency benefit-cost analysis rule tells us about valuing Satisfies existing demand labour input in a benefit-cost analysis. from alternative source (vii) (viii) (ii suppose that a project will use a small amount of labour drawn from the Project Input above market. Under what circumstances should the labour be costed in From additional supply (xi) (xii) the efficiency benefit-cost analysis at: Diverted from alternative use XV) (xvi (a) Wa per unit: (b) Wa per unit? 2. Suppose that the elasticity of demand for a monopolist's product is 1.5. Calculate the ratio of the value of the marginal product of labour to the marginal revenue product of labour. What is the opportunity cost of labour expressed as a multiple of the wage? What is the appropriate shadow-price of labour diverted from the monopoly's production process? 3a. For each of the eight cases indicated in the following diagram, state whether you would use the demand curve or the supply curve to determine the appropriate price for valuation purposes in an efficiency benefit-cost analysis, and state whether the appropriate price is gross or net of the tax or subsidy. In each case briefly justify your answer. Indirect Tax Item to be valued Distorting Corrective Project Output Satisfies additional demand (ii) Satisfies existing demand from alternative source (V ) (vi) Project Input From additional supply (ix (x) Diverted from alternative use xiii) (xiv)