2 ECONOMICS Answer 1: Decision by using cost benefit analysis is not possible for projects which are related to human lives. Thus, cost benefit analysis is not relevant in projects that directly affect the human lives hence, cost benefit analysis is not useful for project A and project B. Cost effectiveness on the other hand is useful for all types of project as it merely compares the cost and effectiveness between two different projects. Equivalent reduction in the risk to life for project A for same costs as project B is calculated below. Cost effectiveness of projects% Project A0.6 Project B0.5 Thus, project A should be preferred over and above project B as the former will result in greater reduction in risk to life with 0.6% for same costs as against 0.5% reduction in risk to life for project B. Answer 2: In order to analyze decisions, systems and processes and organization generally uses cost benefit analysis. Profit and loss analysis on the other hand is about determining the amount of profit and losses earned by an organization in a period. Along with associated costs the benefits are analyzed in cost benefit analysis whereas profit and loss analysis is about assessing the profitability of an organization.
3 ECONOMICS Profit and loss analysis is also quite similar to cost benefit analysis when it comes to the utility of both the tools to the management of an organization. Profit and loss statement of an organization contains the amount of revenue and expenditures of the organization. Management of an organizationusesprofitandlossanalysistoassesstheoperatingeffectivenessofthe organization. Estimating the amount of benefit earned from different costs is possible with the help of cost benefit analysis. Answer 3: Potential Pareto improvement is about analyzing the overall growth and increase in wealth also referred to as Kaldor-Hicks improvement. Pareto improvement, i.e. actual Pareto improvement on the other hand refers to the allocation that harms none and at least a person is helped. Hence, potential Pareto improvement is not an actual Pareto improvement as the probability of at least a person unhappy with due to loss suffered from free trade is almost a certainty thus, there is a significant difference between potential and actual Pareto improvement. A Pareto improvement describes a policy change best to improve the social yardsticks to benefit the society. As already mentioned that actual Pareto improvement is very different from potential Pareto improvement however a policy change is best described with the use of the former than the later(van der Klaauw 88-97). Answer 4: Cost benefit analysis has always been a subject of intense scrutiny with many economists have voiced their concern over the effectiveness and usefulness of the process to the management for decision making purpose. However, there is equally vocal support base to explain the utility if the process for the management. Thus, cost benefit analysis has always been in controversy for
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4 ECONOMICS the sheer polarizing views of economists and management on the benefit and utility of the system. The critique of the system is on the matter of number of assumptions which are crucial to the overall process. Cost benefit analysis is a process where the cost and associated benefits are forecasted on the basis of available information about the current as well as future. Since, there is no method to predict the future conditions with utmost certainty hence, number of assumptions have to be made to calculate the cost benefit of a project. Thus, the efficiency of the system is dependant to a large extent on the correct assumption of future condition. Further the cost benefit analysis is not useful for projects that are socially relevant and not subjected to profit and loss ("Editorial, International Economics" 1-2). Thus, the reason for cost benefit analysis to be extremely controversial is mainly due to the uncertainty that revolves around the process. Unlike profit and loss analysis cost benefit analysis does not provide exact profit or loss expected to be earned or incurred by an organization from a project rather it is merely about the estimating expected benefit from a project along with cost incurred on the project. However, despite the number of limitations and controversies surrounding the process the usefulness of the process to the management is universally accepted. Using cost benefit analysis is extremely useful for commercial projects. Projects which are not socially relevant will be assessed as far as the expected benefits and costs are concerned by using the cost benefit analysis. Answer 5: Part a: The following equation shall be used to calculate the market price and equilibrium quantity for exchange x.
5 ECONOMICS 50 - 0.5p=4p - 40 50-0.5p+0.5p=4p-40+0.5p 50-4.5p=4.5p-40 We get from the above, -9p = 90 Adding 40 to both sides of the equation will give us the following scenario, -9p +40 = 90 +40 -9P = 90 P = 90/9 P= 10 Thus, equilibrium price is $10 and the quantity is 40 units. Part b: Market line for product X is given below on the basis of above calculation.
6 ECONOMICS Market lien along with demand and supply of Product X: Part c:
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7 ECONOMICS Part d: Calculation of the following has been made by assuming certain matters which have not been given such as the expenditure per unit of X, in this case it has been assumed that $5 per unit is the amount of expenditure incurred for production of X. ParticularsAmount ($) Total benefit (40 x 10)400.00 Total expenditure (assumption) (40 x 5)200.00 Net benefit of consumption40 Total revenue (40 x 10)400.00 Total opportunity (40 x 5)200.00 Net benefit of production (40 x 5)200.00
8 ECONOMICS References: "Editorial, International Economics."International Economics160.17 (2019): 1-2. Web. van der Klaauw, Bas. "From Micro Data To Causality: Forty Years Of Empirical Labor Economics."Labour Economics36.12 (2018): 88-97. Web.