Assignment: Cost and Economic Analysis
Chapter 14 Valuing Impacts from Observed Behavior: Indirect Market Methods (Revealed Preferences)
Refer to Chapter 14 to the notes/ PowerPoint slides on CANVAS under ‘Files' for Chapter 14) and view the recorded class meeting, then answer the following questions completely:
1. What is shadow pricing?
2. Summarize the scope and purposes of the following methods:
a. Market Analogy Method
b. Trade-off Method
c. Intermediate Good Method
d. Asset Valuation Method
e. Defensive Expenditures Approach
f. Hedonic Price Method
g. Travel Cost Method
3. Day care services in a small Midwestern city cost $30 per day per child. The high cost of these services is one reason why very few mothers who are on welfare work; given their low potential wages, virtually no welfare mothers are willing to pay these high costs. To combat this problem, the city establishes a new program: In exchange for their welfare benefits, a group of welfare recipients is required to provide day care for the children of other welfare recipients who obtain private-sector employment. The welfare mothers who use these day care services are required to pay a fee of $3 per day per child. These services prove very popular; 1,000 welfare children receive them each day and an additional 500 welfare children are on a waiting list to receive them. Do the mothers of the 1,000 children who receive services under the program value these services at $30,000 ($30 x 1,000) a day, $3,000 a day ($3 x 1,000), or at a value that is greater than $3,000 but less than $30,000? Explain.
4. A worker, who is typical in all respects, works for a wage of $30,000 per year in a perfectly safe occupation. Another typical worker does a job requiring exactly the same skills as the first worker, but in a risky occupation with a known death probability of 1 in 1,000 per year, and receives a wage of $36,000 per year. What value of a human life for workers with these characteristics should a cost-benefit analyst use?
5. Happy Valley is the only available camping area in Rural County. It is owned by the county, which allows free access to campers. Almost all visitors to Happy Valley come from the six towns in the county.
Rural County is considering leasing Happy Valley for logging, which would require that it be closed to campers. Before approving the lease, the county executive would like to know the magnitude of annual benefits that campers would forgo if Happy Valley were to be closed to the public.
An analyst for the county has collected data for a travel cost study to estimate the benefits of Happy Valley camping. On five randomly selected days, he recorded the license plates of vehicles parked overnight in the Happy Valley lot. (As the camping season is 100 days, he assumed that this would constitute a 5 percent sample.) With cooperation from the state motor vehicle department, he was able to find the town of residence of the owner of each vehicle. He also observed a sample of vehicles from which he estimated that each vehicle carried 3.2 persons (1.6 adults), on average. The following table summarizes the data he collected:
|
Town
|
Travel Time (Hours)
|
Miles from Happy Valley
|
Visit Rate (5% of total number of visits)
|
|
A
|
1
|
22
|
77.7
|
|
B
|
1.5
|
34
|
65
|
|
C
|
2
|
48
|
57.6
|
|
D
|
2.5
|
56
|
53.4
|
|
E
|
4
|
88
|
19.8
|
|
F
|
4.5
|
94
|
11
|
In order to translate the distance traveled into an estimate of the cost campers faced in using Happy Valley, the analyst made the following assumptions. First, the average operating cost of vehicles is $0.36 per mile. Second, the opportunity cost to adults of travel time is 40 percent of their wage rate; it is zero for children. Third, adult campers have the average county wage rate of $9.25 per hour.
The analyst has asked you to help him use this information to estimate the annual benefits accruing to Happy Valley campers. Specifically, assist with the following tasks:
a. Using the preceding information, calculate the travel cost of a vehicle visit (TC) per person from each of the towns.
b. For the six observations, plot a graph showing the demand curve for the camping site (Visit rate on the x-axis and travel cost on the y-axis).
c. Calculate the value of the camping area for each zone and the overall value for the amenity.