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

Question 1

The primary method that decision makers use to evaluate choices among competing alternatives is called

A) the competitive forces model.
B) cost-benefit analysis.
C) heads-or-tails analysis.
D) absolute advantage.

Answer 1

cost-benefit analysis.

Question 2

You are trying to decide if you should take a day off from work to go to a casino. In making your decision, you compare what you would sacrifice to go to the casino (lost wages for the day, potential losses at the casino, the amount of work you will have to make up, etc.) with the enjoyment you would receive from the day off (relaxation, potential winnings, etc.). The analysis you have just conducted is called

A) cost-benefit analysis.
B) comparative advantage analysis.
C) stress analysis.
D) sacrificial-wage analysis.

Answer 2

cost-benefit analysis.

Question 3

You are trying to decide if you should take a vacation. Your cost-benefit analysis indicates that the benefits outweigh the costs. You should

A) take a vacation.
B) not take a vacation.
C) take a vacation only if you have enough cash saved up to pay for it up front.
D) More information is needed to make this decision.

Answer 3

take a vacation.

Question 4

Claudia's Copy Shop is deciding which 3-D printer to purchase, and it only has room for one printer. It can purchase the "Mini-Me"small-object printer, which would generate benefits of $50,000 at a cost of $5,000, or it can purchase the "Gargantuan"large-object printer which would generate benefits of $250,000 at a cost of $25,000. Based on these numbers, Claudia's Copy Shop should purchase

A) the "Mini-Me" printer.
B) the "Gargantuan" printer.
C) either printer, since the cost of each is exactly 10 percent of the benefit from each.
D) neither printer, since the cost of each is too high for a 3-D printer.

Question 5

Gerald is deciding what kind of light bulbs to install in the light fixtures in his new home. He has it narrowed down to compact fluorescent bulbs (CFLs) or LED bulbs. The CFLs will cost $350 and the LEDs will cost $900. Gerald estimates that the energy-saving benefits from the CFLs will be $750 and the energy-saving benefits from the LEDs will be $1,250. Based on these numbers, Gerald should purchase the

A) CFLs because the cost is cheaper.
B) CFLs because the the net benefit is greater.
C) LEDs because the benefit is greater.
D) LEDs because the net benefit is greater.

Question 6

Marginal cost refers to the ________ cost incurred when choosing a particular action.

A) total
B) net
C) implicit
D) additional

Question 7

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

A) total
B) gross
C) marginal
D) explicit

Question 8

Bruno makes tamales to sell at the local farmer's market, and each month he sells all he makes. Each month, tamales had been selling for $10 per dozen and Bruno made 80 dozen tamales at a total cost of $500. It costs Bruno $100 to rent a booth at the farmer's market. This month, as Bruno is getting ready to pay management the $100 booth rental fee and display his tamales, he discovers that he will need to cut his price to $5 per dozen to compete with other tamale sellers. Bruno should

A) not pay the booth rental fee and not set up his booth because he has already spent $500 to make his tamales and will only receive $400 by selling them.
B) only set up his booth if he does not have to pay the booth rental fee because then he will at least break even.
C) go ahead and pay the fee and set up his booth because the marginal benefit of selling his tamales is $400 and the marginal cost is $100.
D) not set up his booth this month because the marginal benefit of selling his tamales is $400 and the marginal cost is $600.

Question 9

The cost-benefit analysis on the financial impact smokers have on society conducted by Vanderbilt professor Kip Viscusi concludes that

A) smokers provide a net public service to society.
B) smokers are a financial drain on society.
C) smokers contribute less to retirement and pension programs than they receive from those programs.
D) smokers account for about 32 cents of net cost to everyone else in society for every pack of cigarettes smoked.

Question 10

________ should be considered when conducting a cost-benefit analysis.

A) Total costs and total benefits
B) Only marginal costs and marginal benefits
C) Only implicit costs and implicit benefits
D) All costs and all benefits

Question 11

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

Question 12

Arriving at a decision by comparing total costs and total benefits is called marginal analysis.

Question 13

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

Question 14

The additional costs you expect to incur if you undertake an activity and the additional benefits you expect to receive if you undertake an activity are called ________ costs and benefits

Question 15

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?

Question 16

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.

Question 17

In the case of the Ford Pinto, Ford decided that

A) it would be cheaper to pay damages to families involved in crashes than to fix the problems with the Pinto.
B) it would be more expensive to pay damages to families involved in crashes than to fix the problems with the Pinto.
C) the problems with the Pinto could not be easily or cheaply fixed.
D) it would not be held liable for damages caused by the Pinto and therefore had no reason to fix them.

Question 18

There are ________ between the risks individuals expose one another to and the risks corporations expose their customers to.

A) major differences
B) no fundamental differences
C) only financial differences
D) significant, but relatively minor differences

Question 19

Which of the following activities exposes others to risk?

A) driving
B) smoking
C) playing golf
D) all of the above

Question 20

A person's ________ indicate her willingness to expose others to risk and that she is doing it for ________.

A) actions; her own benefit
B) actions; society's benefit
C) finances; her own benefit
D) finances; society's benefit

Question 21

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

Question 22

It is impossible for corporations to avoid trading their own gain against others' lives.

Question 23

In terms of exposing others to risk, explain if there is a difference between you choosing to text while driving and a company selling tablet computers where the batteries have been known to explode when the tablet is left on for a long period of time.

Question 24

After researching the effectiveness of child safety seats in reducing the accident death rate of children ages one to four, economist Steven Levitt found that

A) for children under age four, safety seats are safer than any alternative.
B) for children under age two, safety seats are safer than any alternative, but beyond age two, they provide no appreciable benefit over standard car seat belts.
C) safety seats are actually more dangerous than standard car seat belts for children of any age.
D) safety seats provide no appreciable benefit over standard car seat belts for children of any age.

Question 25

The Eyes Wide Open Company is considering producing binoculars that can be used to directly view the sun during a solar eclipse, but it knows that some customers could potentially go blind when using the product. The Eyes Wide Open Company

A) should definitely not produce these binoculars.
B) has no way to include the value of the potential damage to eyesight in its cost-benefit analysis.
C) has little choice but to include the value of the potential damage to eyesight in its cost-benefit analysis.
D) must redesign the binoculars so there is absolutely no possibility of damaged eyesight to customers.

Question 26

According to cost-benefit analysis, where safety is concerned

A) it is possible to not be safe enough.
B) it is possible to be too safe.
C) it is possible to be just safe enough.
D) All of the above are possible.

Question 27

A cost-justified precaution is a safety measure whose

A) benefits outweigh its costs.
B) costs outweigh its benefits.
C) costs equal its benefits.
D) costs are zero.

Question 28

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

A) $3.00.
B) $30.00.
C) $37.50.
D) $40.00.

Question 29

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 manufacturer

A) should add the chain guard because it is cost justified.
B) should add the chain guard even though it is not cost justified.
C) should not add the chain guard because it is not cost justified.
D) should not add the chain guard because this will reduce profits.

Question 30

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 injury cost per handgun is

A) $145.
B) $180.00.
C) $460.
D) $800.

Question 31

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

A) should add the fingerprint recognition device because it is cost justified.
B) should add the fingerprint recognition device even though it is not cost justified.
C) should not add the fingerprint recognition device because it is not cost justified.
D) should not add the fingerprint recognition device because this will reduce profits.

Question 32

Suppose that the local health board discovers some unsanitary conditions at your favorite sushi restaurant. An economist would likely have what to say about this situation?

A) "All unsanitary conditions at this restaurant must be eliminated."
B) "The restaurant owner obviously cares more about profits than about his customers."
C) "No one should eat at this restaurant due to the potential health hazard."
D) "Eliminating all of the unsanitary conditions might cost more than the value of the benefits that would be gained."

Question 33

With respect to the Ford Pinto, comparing the cost of the modification to the fuel tank with the lives the modification would save was the best way Ford could save the greatest number of lives at the lowest possible cost.

Question 34

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.

Question 35

Companies are never justified in not installing all possible safety devices in their products when the omission of those safety devices could result in the loss of life to the users of the products.

Question 36

A safety measure whose benefits outweigh its costs is called a ________.

Question 37

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.

Question 38

Commercial airlines have two primary suppliers of large jet aircraft: Boeing and Airbus. Since millions of people fly with commercial airlines each year, should these aircraft manufacturers be required to incorporate every possible safety feature into the aircraft they manufacture? Should the manufacturers be allowed to incorporate no safety features? If some safety considerations are to be required, how would an economist decide on which features to include and which not to include?

Question 39

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 precautions that are not cost-justified.

A) overestimated, overestimated
B) overestimated; underestimated
C) underestimated; overestimated
D) underestimated; underestimated

Question 40

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.

A) overestimated, overestimated
B) overestimated; underestimated
C) underestimated; overestimated
D) underestimated; underestimated

Question 41

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) overestimated, overestimated
B) overestimated; underestimated
C) underestimated; overestimated
D) underestimated; underestimated

Question 42

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.

A) overestimated, overestimated
B) overestimated; underestimated
C) underestimated; overestimated
D) underestimated; underestimated

Question 43

When it comes to unlikely but potentially deadly events, individuals

A) are very good at estimating risks.
B) are not very good at estimating risks.
C) are better than large corporations at estimating risks.
D) do not even attempt to estimate risks.

Question 44

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. What is the value Uni-Go has placed on a life?

A) $162,162.
B) 499,500.
C) $540,000.
D) $2,997,000.

Question 45

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. Uni-Go's cost-benefit recommendation is to

A) add the safety device.
B) not add the safety device.
C) add the safety device plus additional safety devices.
D) not produce the unicycle.

Question 46

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. If Uni-Go has underestimated the probability of death and the true probability of death is 1/80,000, then the true death cost per unicycle is

A) $2.03.
B) $5.55.
C) $6.24.
D) $6.75.

Question 47

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. If Uni-Go has underestimated the probability of death and the true probability of death is 1/80,000, then the true cost-benefit recommendation would be for Uni-Go to

A) add the safety device.
B) add the safety device and all other safety devices available.
C) not add the safety device.
D) not add the safety device nor any other safety devices.

Question 48

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. If Uni-Go has underestimated by one-half the true value of a life, what is the true death cost per unicycle?

A) $3.00
B) $2.78
C) $11.10
D) $12.00

Question 49

Uni-Go Company makes motorized unicycles. Uni-Go is deciding whether to include a safety feature that would cost $6 for each unicycle. Uni-Go estimates the probability of death without the safety feature is 1/90,000 and the death cost per unicycle is $5.55. If Uni-Go has underestimated by one-half the true value of a life, then the true cost-benefit recommendation would be for Uni-Go to

A) add the safety device.
B) add the safety device and all other safety devices available.
C) not add the safety device.
D) not add the safety device nor any other safety devices.

Question 50

According to the U.S. National Safety Council, a person has a better chance of being killed in which of the following situations?

A) in an aircraft accident
B) from being electrocuted
C) while riding a bicycle
D) while walking

Question 51

If a conscientious manufacturer underestimates the probability of his product killing someone, the manufacturer will likely take precautions that are not cost justified.

Question 52

Human beings are generally very good at accurately estimating probabilities.

Question 53

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

Question 54

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?

Question 55

A manufacturer of grenade launchers estimates that the probability of a fatal accident caused by the design of its product is 1/80,000 and the value of a life lost is $2 million. The manufacturer can change the design to eliminate that chance for $20 per grenade launcher 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 value of a life is actually $1.5 million?

Question 56

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?

Question 57

Attempting to answer the question of how much a life is worth is a job undertaken by

A) macroeconomists.
B) forensic economists.
C) economic theorists.
D) environmental economists.

Question 58

Estimating the value of an injured or deceased person's life by calculating what he or she would have earned over the remainder of his or her life is called the

A) compensating differential approach.
B) death-and-taxes approach.
C) lost-income approach.
D) earnings-bracket approach.

Question 59

Based on the lost-income approach, which of the following 30 year old males would most likely be worth the most in terms of the value of his life?

A) Devin, a high-school dropout who works as a barista.
B) Antonio, a college graduate who is on permanent disability due to severe diabetes.
C) Timothy, a licensed electrician with two years of college.
D) Jamal, a CPA with a master's degree in accounting.

Question 60

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

A) compensating differential approach
B) actuarial approach
C) lost-income approach
D) sentimental approach

Question 61

The extra pay people earn in exchange for undertaking risky or otherwise undesirable work is called

A) a compensating differential.
B) arbitrage income.
C) overtime pay.
D) a fringe benefit.

Question 62

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

A) lost-income approach.
B) compensating differential approach.
C) daredevil approach.
D) price-is-right approach.

Question 63

Using the compensating differential approach, the value of a life is calculated as

A) the compensating differential multiplied by the increased chance of death.
B) the sum of the compensating differential and the increased chance of death.
C) the compensating differential divided by the increased chance of death.
D) the difference between the compensating differential and the increased chance of death.

Question 64

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) $2 million
B) $2.5 million
C) $6.25 million
D) $25 million

Question 65

Erik can work as a forest ranger, where the probability of being killed in a work-related accident is 1/6,000, or he can earn an additional $800 a year by working as a game warden, where the probability of being killed in a work-related accident is 3/6,000. Using the compensating differential approach and the above information, what is the value of Erik's life?

A) $1.6 million
B) $2.4 million
C) $3.2 million
D) $4.8 million

Question 66

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?

A) $1,500
B) $2,000
C) $2,500
D) $3,500

Question 67

Darnell can work on an oil rig, where the probability of being killed in a work-related accident is 4/6,000, or he can earn work as a lumberjack, where the probability of being killed in a work-related accident is 1/6,000. Using the compensating differential approach, the value of Darnell's life is $6 million. How much more per year will working on an oil rig pay than working as a lumberjack?

A) $2,000
B) $3,000
C) $4,000
D) $6,000

Question 68

In wrongful death lawsuits, courts typically take into consideration the victim's character and personality when assessing damages.

Question 69

All else equal, people with risky jobs tend to make more money than people with safe jobs.

Question 70

Most studies using the compensating differential approach have estimated the value of a life to be between $3 million and $7 million.

Question 71

The lost-income approach tends to value a life at a higher amount than does the compensating differential approach.

Question 72

Javier can earn $80,000 a year working as a firefighter, or $78,000 a year working as a police officer. The probability of death from working as a firefighter is 1/2,000, and the probability of death from working as a police officer is 1/4,000. Using the compensating differential approach and the above information, what is the value of Javier's life?

Question 73

Isabel can work as a rodeo clown, where the probability of being killed in a work-related accident is 5/10,000, or she can earn work as a sword swallower, where the probability of being killed in a work-related accident is 3/10,000. Using the compensating differential approach, the value of Isabel's life is $5 million. How much more per year will working as a rodeo clown pay than working as a sword swallower?