The city of Smogville has long been plagued by urban smog. There are two potential smog reducing policy options being evaluated by economists using benefit-cost analysis. Both policy options are to be implemented over a three year period.

1. Option 1: Using a hedonic pricing model economists estimate that per resident benefits will accrue in increments of $200 at the end of each of the next three years. Find the present value of benefits (PVB) for each resident, assuming an annual discount rate of 5%. (3 marks)
2. Assume there are 1.5 million adult residents in Smogville to whom the per-residentPVBwould accrue. Further, the estimated present value of costs (PVC) for this policy option is $500 million. What is the net present value of this option? Show your supporting calculations. (3 marks)
3. Option 2: An alternative policy option to reduce smog costs the same ($500 million) but the benefits are more uncertain. The expected benefits could be $180 per year with a 50 percent probability or alternatively $260 per year with a 50 percent probability. What is the NPV of this option? (3 marks)
4. Which of the two option is preferred? Why? (3 marks)