ECON 4140 (2013) Mid-Term 1 - Answers
1. Short definitions (see text)
2. Imagine that you live in a city that currently does not require bicycle riders to wear
helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a
helmet.
a. From your perspective, what are the major costs and benefits of a proposed city
ordinance that would require all bicycle riders to wear helmets
b. What are the categories of costs and benefits from society’s perspective?
c. Repeat this analysis with an adjustment that requires only children under 12 to wear
helmets. (Do not forget enforcement costs) (25 marks)
a. For individual riders the important costs are: the purchase price of a helmet, the
reduced pleasure of riding your bicycle while wearing a helmet, diminished
appearance when you take the helmet off (bad hair), the inconvenience of keeping
the helmet available and maybe for some increased sense of safety (leading to
increased risk taking due to moral hazard). The most significant categories of
benefits are probably: reduced risk of serious head injury (morbidity) and reduced
risk of death (mortality).
b. These are:
program enforcement (a cost)
reduced health care costs (a benefit), although this may not be as high as one
might expect if bicyclists ride more aggressively because they feel safer (this is
called off-setting behaviour or moral hazard)
increased pollution, due to cyclists switching to cars (a cost) – a likely minor
issue
c. The analysis is essentially no different, just that enforcement costs may fall if this
limit is widely accepted and it becomes a norm.
Note: Changes in the sales of helmets or bikes occurs in the secondary market and are
not counted in the primary market.
3. A town’s recreation department is trying to decide how to use a piece of land. One
option is to put up basketball courts with an expected life of eight years. Another is to
install a swimming pool with an expected life of 24 years. The basketball courts would
cost $180,000 to construct and yield net benefits of $40,000 at the end of each of the
eight years. The swimming pool would cost $2.25 million to construct and yield net
benefits of $170,000 at the end of each of the 24 years. Each project is assumed to have
zero salvage value at the end of its life. Using a real discount rate of 4 percent, which
project offers larger net benefits?
As only one of these projects can be built on the site, they are mutually exclusive.
The comparison is complicated because the swimming pool has an expected life three
1. Short definitions (see text)
2. Imagine that you live in a city that currently does not require bicycle riders to wear
helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a
helmet.
a. From your perspective, what are the major costs and benefits of a proposed city
ordinance that would require all bicycle riders to wear helmets
b. What are the categories of costs and benefits from society’s perspective?
c. Repeat this analysis with an adjustment that requires only children under 12 to wear
helmets. (Do not forget enforcement costs) (25 marks)
a. For individual riders the important costs are: the purchase price of a helmet, the
reduced pleasure of riding your bicycle while wearing a helmet, diminished
appearance when you take the helmet off (bad hair), the inconvenience of keeping
the helmet available and maybe for some increased sense of safety (leading to
increased risk taking due to moral hazard). The most significant categories of
benefits are probably: reduced risk of serious head injury (morbidity) and reduced
risk of death (mortality).
b. These are:
program enforcement (a cost)
reduced health care costs (a benefit), although this may not be as high as one
might expect if bicyclists ride more aggressively because they feel safer (this is
called off-setting behaviour or moral hazard)
increased pollution, due to cyclists switching to cars (a cost) – a likely minor
issue
c. The analysis is essentially no different, just that enforcement costs may fall if this
limit is widely accepted and it becomes a norm.
Note: Changes in the sales of helmets or bikes occurs in the secondary market and are
not counted in the primary market.
3. A town’s recreation department is trying to decide how to use a piece of land. One
option is to put up basketball courts with an expected life of eight years. Another is to
install a swimming pool with an expected life of 24 years. The basketball courts would
cost $180,000 to construct and yield net benefits of $40,000 at the end of each of the
eight years. The swimming pool would cost $2.25 million to construct and yield net
benefits of $170,000 at the end of each of the 24 years. Each project is assumed to have
zero salvage value at the end of its life. Using a real discount rate of 4 percent, which
project offers larger net benefits?
As only one of these projects can be built on the site, they are mutually exclusive.
The comparison is complicated because the swimming pool has an expected life three
