Exam 2: Cost-Benefit Analysis and the Value of a Life

Lucinda is deciding whether to enroll in an art school or a culinary school. The art school will cost $38,000 and the culinary school will cost $52,000. Lucinda estimates that the benefits from attending the art school will be $75,000 and the benefits from attending the culinary school will be $88,000. Based on these numbers, in which school should Lucinda enroll?

If the risk associated with a particular outcome is ________, or the value of a particular outcome is ________, then cost-benefit analysis might lead people to accept too little risk.

A manufacturer of wood chippers estimates that the probability of a fatal accident caused by the design of its product is 1/40,000 and the value of a life lost is $2 million. The manufacturer can change the design to eliminate that chance for $60 per wood chipper and is prepared to incorporate all cost-justified precautions. Will the manufacturer change the design? What would the benevolent social planner think about the manufacturer's decision if the true probability of a fatal accident is actually 1/30,000?

A method of valuing a life that estimates how much money it takes to get the typical person to bear an additional risk of death is called the

The additional benefit incurred when undertaking an activity is the ________ benefit.

It is impossible to incorporate the value of human life into implicit and explicit cost-benefit analyses.

An activity should be undertaken if the marginal benefit of the activity is greater than the marginal cost of the activity.

If the risk associated with a particular outcome is ________, or the value of a particular outcome is ________, then cost-benefit analysis might lead people to indulge in too much risk.

Maria can work as a coal miner, where the probability of being killed in a work-related accident is 5/8,000, or she can earn work as a truck driver, where the probability of being killed in a work-related accident is 2/8,000. Using the compensating differential approach, the value of Maria's life is $4 million. How much more per year will working as a coal miner pay than working as a truck driver?

If the risk associated with a particular outcome is ________, or the value of a particular outcome is ________, then cost-benefit analysis might lead people to take too few precautions.

Dahlia can earn $60,000 a year working at a relatively safe job, or $65,000 a year working at a riskier job. The probability of death from working at the relatively safe job is 1/5,000, and the probability of death from working at the riskier job is 1/1,000. Using the compensating differential approach and the above information, what is the value of Dahlia's life?

A manufacturer of industrial paper shredders can make its machines safer by adding a laser-sensored kill switch to its products. Adding the kill switch costs $17 per machine. The manufacturer estimates that this will prevent 50 injuries for every 30,000 paper shredders sold and that, on average, each injury causes $5,500 of harm. What is the injury cost per paper shredder? Explain whether the manufacturer should or should not add the kill switch to the paper shredder.

A chain saw manufacturer can make its chain saws safer by adding a titanium chain guard to its products. Adding the titanium chain guard costs $35 per chain saw. The manufacturer estimates that this will prevent 10 injuries for every 5,000 chain saws sold and that, on average, each injury causes $15,000 of harm. The injury cost per chain saw is

If a conscientious manufacturer underestimates the true value of life, the manufacturer will likely fail to take all cost-justified precautions.

A handgun manufacturer can make its handguns safer by adding a fingerprint recognition device to its products, so only the owner would be able to fire the gun. Adding the fingerprint recognition device costs $145 per handgun. The manufacturer estimates that this will prevent 150 injuries for every 100,000 handguns sold and that, on average, each injury causes $120,000 of harm. The manufacturer

The Who-Needs-A-Doctor? Company makes a do-it-yourself rhinoplasty kit. The company is deciding whether to include a safety feature that would cost $40 for each kit. The company estimates the probability of death without the safety feature is 1/10,000 and the death cost per kit is $50. Based on this information, answer the following questions: a. What is the value the company has placed on a life? b. What is the company's cost-benefit recommendation? c. If the company has overestimated the probability of death and the true probability of death is 1/15,000, what is the true death cost per rhinoplasty kit? d. If the company has overestimated the probability of death and the true probability of death is 1/15,000, what would the true cost-benefit recommendation be for the company? e. If the company has correctly estimated the probability of death but has underestimated by one-half the true value of a life, what is the true death cost per rhinoplasty kit? f. If the company has correctly estimated the probability of death but has underestimated by one-half the true value of a life, what would the true cost-benefit recommendation be for the company?

When conducting cost-benefit analysis, it is important to ignore previously incurred costs and previously received benefits.

Courts generally use the ________ when determining the value of human life in wrongful death suits.

If a company could spend $3 per bicycle on a safety device that would prevent $2,000 worth of harm for every 1,000 bicycles sold, spending the $3 would be a cost-justified precaution.

Salvador grows orchids to sell to local florists. When Salvador began raising his current crop of 1,000 orchids, he could sell them for $20 per plant, and he incurred shipping costs of $3 per plant. His cost of raising orchids is $8 per plant. When his crop was ready to ship, florists were only paying $9 per plant. Use marginal analysis to determine Salvador's best course of action given the drop in the price of orchids.