(Instructor-provided spreadsheet recommended) Consider an individual’s utility function over two goods, qm and qs, where m indicates the primary market in which a policy will have its effect and s is a related secondary market: Where α, βm, βs, and γ are parameters such that βm> 0, and βs> 0, βm< (1-γqs)/2qm, βs < (1-γqm)/2qs, and γ < pmβs/ps + psβm/pm. For purposes of this exercise, assume that α =1, βm = 0.01, βs = 0.01, and γ = -0.015. Also assume that the person has a budget of $30,000 and the price of qm, pm, is $100 and the price of qs, ps, is $100. Imagine that the policy under consideration would reduce pm to $90. The provided spreadsheet has two models. Model 1 assumes that the price in the secondary market does not change in response to a price change in the primary market. That is, ps equals $100 both before and after the reduction in pm. Step 1 solves for the quantities that maximize utility under the initial pm. Step 2 solves for the quantities that maximize utility under the new pm. Step 3 requires you to make guesses of the new budget level that would return the person to her original level of utility prior to the price reduction — keep guessing until you find the correct budget. (You may wish to use the Tools|Goal Seek function on the spreadsheet instead of iterative guessing.) Step 4 calculates the compensating variation as the difference between the original budget and the new budget. Step 5 calculates the change in the consumer surplus in the primary market. Model 2 assumes that ps = a + b qs. Assume that b=0.25 and a is set so that at the quantity demanded in Step 2 of model 1, ps=100. As there is no analytical solution for the quantities before the price change, Step 1 requires you to make guesses of the marginal utility of money until you find the one that satisfies the budget constraint for the initial pm. Step 2 repeats this process for the new value of pm. Step 3 requires you to guess both a new budget to return the person to the initial level of utility and a marginal utility of money that satisfies the new budget constraint. A block explains how to use Tools|Goal Seek to find the marginal utility consistent with your guess of the new budget needed to return utility to its original level. Step 4 calculates the compensating variation. Step 5 calculates the change in the consumer surplus in the primary market and bounds on the change in consumer surplus in the secondary market. Use these models to investigate how well the change in social surplus in the primary market approximates compensating variation. Note that as utility depends on consumption of only these two goods, there are substantial income effects. That is, a price reduction in either of the goods substantially increases the individual’s real income. Getting started: The values in the spreadsheet are set up for a reduction in pm from $100 to $95. Begin by changing the new primary market price to $90 and resolving the models.
> Recall exercise 2 from Chapter 5 in which a country imposes an import fee on the crude oil it imports. Assume that prior to the imposition of the import fee, the country annually consumed 900 million short tons of coal, all domestically mined, at a price
> Recall exercise 1 from Chapter 5 in which an increase in the toll on a highway from $.40 to $.50 would reduce use of the highway by 5,000 cars per week. Data From exercise 1 of Chapter 5: Suppose the government is considering an increase in the toll on
> Imagine that the net present value of a hydroelectric plant with a life of 70 years is $25.73 million and that the net present value of a thermal electric plant with a life of 35 years is $18.77 million. Rolling the thermal plant over twice to match the
> 1. How would the shadow price of a high school diploma change if the labor force participation rate for increase? 2. (Instructor provided spreadsheet required) How much would the shadow price of a diploma change if the probabilities of high school gradua
> 1. a. Why did Blomquist and his colleagues believe that contingent valuation was needed to fully assess the value of a 10 percent expansion of KCTCS? b. Did their findings suggest that they were correct? 2. Blomquist and his colleagues predict that will
> 1. If you were running a state welfare agency and had to choose one of the programs listed in the table, which table’s columns would you particularly focus upon? Why? 2. If you were running a state welfare agency and had to choose one of the programs li
> 1. What information would be needed to estimate the net benefits of a state-wide Alzheimer's disease screening program for 65 year olds? 2. Imagine that you wanted to use a life-course model similar to the Alzheimer's disease model to estimate the net be
> 1. Would you describe this study as a Distributional CBA? 2. Why is there no consumer surplus included as a benefit? 3. What weaknesses do you see in this CBA? If corrected, would they increase or decrease the expected NPV?
> Imagine Washington State is considering implementing a program that pays monetary awards to families when their high school age children meet certain goals (for example, school attendance, achievement on standardized tests, receiving regular dental check
> A town with a population of 164,250 persons who live in 39,050 households is considering introducing a recycling program that would require residents to separate paper from their household waste so that it can be sold rather than buried in a landfill lik
> 1. You are a decision-maker who has to decide whether to adopt the Tulsa IDA program on a permanent basis relying, in part, on the information provided by the CBA described in this case study. Required: a. The case study provides results for a range of
> Analysts wish to evaluate alternative surgical procedures for spinal cord injuries. The procedures have various probabilities of yielding the following results: Full recovery (FR) — the patient regains full mobility and suffers no chronic pain. Full fun
> A public health department is considering five alternative programs to encourage parents to have their preschool children vaccinated against a communicable disease. The following table shows the cost and number of vaccinations predicted for each program:
> Assuming that the elasticity of the value of statistical life with respect to income is between 0.5 and 1.2 and that the value of statistical life in the United States is between $4 million and $13 million, ranges of values of a statistical life for Aust
> Analysts estimate that the expansion of the capacity of the criminal courts in a city would require about 7,200 additional hours of juror time. The average wage rate in the county is $15/hour. A recent survey by the jury commissioner, however, found that
> Suppose a 40-mile stretch of rural road with limited access is used primarily by regional commuters and business travelers to move between two major interstate highways. The legal speed limit on the road is currently 55 miles per hour (mph) and the estim
> Consider a project that would involve purchasing marginal farmland that would then be allowed to return to wetlands capable of supporting migrant birds. Researchers designed a survey to implement the dichotomous choice method. They reported the following
> A number of residents of Dullsville have complained to the mayor that the center of town looks shabby compared to the centers of many other nearby towns. At the mayor’s request, the Parks Department has put together a proposal for converting the town squ
> The construction of a dam that would provide hydroelectric power would result in the loss of two streams: one that is now used for sport fishing; and another that does not support game fish but is part of a wilderness area. a. Imagine that a contingent v
> (Instructor-provided spreadsheet recommended.) 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. Rur
> Five years ago a community college district established programs in ten new vocational fields. The district now wants to phase out those programs that are not performing successfully and retain those programs that are performing successfully. To determin
> A worker, who is typical in all respects, works for a wage of $50,000 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 probabili
> Child 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
> Perhaps the most careful effort to measure the effects of compensatory preschool education was the Perry Preschool Project begun in Ypsilanti, Michigan in 1962. Children, mostly three years old, were randomly assigned to treatment (58 children) and contr
> Consider a government training program that provides low-skilled men job-specific training. To evaluate this program, members of the target population were randomly assigned to either a treatment group that was eligible to receive services under the prog
> Imagine a wilderness area of 200 square miles in the Rocky Mountains. How would you expect each of the following factors to affect people’s total willingness to pay for its preservation? a. The size of the total wilderness area still remaining in the Roc
> In exercise (3) the optimal strategy involved testing. Does testing remain optimal if the prevalence of the disease in the population is only .05? Does your answer suggest any general principle? Data From exercise 3: The prevalence of a disease among a
> Imagine that a rancher would have an income of $80,000 if his county remains free from a cattle parasite but only $50,000 if the county is exposed to the parasite. Further imagine that a county program to limit the impact of exposure to the parasite woul
> An analyst wishing to estimate the benefits of preserving a wetland has combined information obtained from two methods. First, she surveyed those who visited the wetland - fishers, duck hunters, and bird watchers - to determine their willingness to pay f
> Imagine that we want to value a cultural festival from the point of view of a risk-averse person. The person’s utility is given by U (I) where $I is her income. She has a 50 percent chance of being able to get vacation time to attend the festival. If sh
> A large rural county is considering establishing a medical transport unit that would use helicopters to fly emergency medical cases to hospitals. Analysts have attempted to estimate the benefits from establishing the unit in two ways. First, they surveye
> Two alternative mosquito control programs have been proposed to reduce the health risks of West Nile disease in a state over the next five years. The costs and effectiveness of each program in each of the next five years are displayed below: Alternativ
> The prevalence of a disease among a certain population is 0.40. That is, there is a 40 percent chance that a person randomly selected from the population will have the disease. An imperfect test that costs $250 is available to help identify those who ha
> Use several alternative discount rate values to investigate the sensitivity of the present value of net benefits of the dam in exercise (1) to the assumed value of the real discount rate. Data from exercise 1: The initial cost of constructing a permanen
> The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $830 million. The annual net benefits will depend on the amount of rainfall: $36 million in a “dry” year, $58 million in a “wet” year, and $104 million in
> Imagine that the current owner of the land in the previous exercise was willing to sell the land for $2 million. Assuming this amount equaled the social opportunity cost of the land, calculate the net benefits if the county were to purchase the land as a
> Assume a project will result in benefits of $1.2 trillion in 500 years by avoiding an environmental disaster that otherwise would occur at that time. a. Compute the present value of these benefits using a time-constant discount rate of 3.5. b. Compute t
> Assume the following: Society faces a marginal excess tax burden of raising public revenue denoted METB; the shadow price of capital equals θ; public borrowing displaces private investment dollar for dollar; and public revenues raised through taxes displ
> An analyst for a municipal public housing agency explained the choice of a discount rate as follows: “Our agency funds its capital investments through nationally issued bonds. The effective interest rate that we pay on the bonds is the cost that the agen
> The following table gives cost and benefit estimates in real dollars for dredging a navigable channel from an inland port to the open sea. Dredging and Savings to Value of Pleasure Year Patrol Costs ($) Shippers ($) Boating ($) 0 2,548,00
> A country imports 3 billion barrels of crude oil per year and domestically produces another 3 billion barrels of crude oil per year. The world price of crude oil is $90 per barrel. Assuming linear curves, economists estimate the price elasticity of domes
> The environmental protection agency of a county would like to preserve a piece of land as a wilderness area. The current owner has offered to lease the land to the county for 20 years in return for a lump-sum payment of $1.1 million, which would be paid
> CBAs have been conducted of six proposed projects. None of these projects are mutually exclusive and the agency has a sufficient budget to fund those that will make society better off. The findings from the CBAs are summarized here in millions of dollars
> 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 8 years. Another is to install a swimming pool with an expected life of 24 years. The basketball courts woul
> A government data processing center has been plagued in recent years by complaints from employees of back pain. Consultants have estimated that upgrading office furniture at a net cost of $430,000 would reduce the incidence and severity of back injuries,
> A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge. The temporary bridge can be put up in a few weeks at a cost of $730,000. At the end of three years, it wou
> Imagine that a project involves putting a high-voltage power transmission line near residential property. Discuss how you might predict and monetize its impact on residents.
> Review the following CBA: David L. Weimer and Mark A. Sager, ““Early Identification and Treatment of Alzheimer’s disease: Social and Fiscal Outcomes,” Alzheimer’s & Dementia 5(3), 2009, 215-226. Evaluate the empirical basis for prediction and monetizatio
> A proposed government project in a rural area with 100 unemployed persons would require the hiring of 20 workers. The project would offer wages of $12 per hour. Imagine that the reservation wages of the one-hundred unemployed fall between $2 and $20. R
> Suppose the government is considering an increase in the toll on a certain stretch of highway from $.40 to $.50. At present, 50,000 cars per week use that highway stretch; after the toll is imposed, it is projected that only 45,000 cars per week will use
> Assume that a typical unskilled rural worker in a developing country would be paid 2 dubyas a week if he migrates to the city and finds a job. However, the unemployment rate for unskilled workers is 40 percent in the city. Required: a. What does the Ha
> Consider a low-wage labor market. Workers in this market are not presently covered by the minimum wage, but the government is considering implementing such legislation. If implemented, this law would require employers in the market to pay workers a $5 ho
> A city is about to build a new sanitation plant. It is considering two sites, one located in a moderately high-income neighborhood and the other in a low-income neighborhood. Indeed, most of the residents in the latter neighborhood live below the poverty
> What are some of the advantages of technological innovation? Disadvantages?
> Why is innovation so important for firms to compete in many industries?
> Why do you think so many innovation projects fail to generate an economic return?
> The Walt Disney Company is probably the best known entertainment company in the world. Founded in 1923 as a producer of animated films, it grew to become an entertainment conglomerate that includes theme parks, live action film production, television, pu
> Founded in 2003 by Rick Alden, Skullcandy grew from a simple idea to a company with products distributed in approximately 80 countries and generating over $200 million in revenues annually. The company’s core products, headphones with an extreme sport ae
> Google was founded in 1998 by two Stanford Ph.D. students, Sergey Brin and Larry Page, who had developed a formula for rank ordering random search results by relevancy. Their formula gave rise to an incredibly powerful Internet search engine that rapidly
> In 1995, Edward Lanphier founded Sangamo Biosciences for the purpose of developing zinc-finger nucleases (ZFNs), a new technology that offered potential for “editing” the genetic code of a living individual to correct
> Mahindra Tractors, the Farm Equipment Sector of the Mahindra & Mahindra Group in India is one of the world’s largest producers of tractors.a In the late 1990’s, over 20 percent of Indian’s gross domestic product came from agriculture and nearly 70 percen
> What are the benefits and costs of involving customers and suppliers in the development process?
> Gavriel Iddan was an electro-optical engineer at Israel’s Rafael Armament Development Authority, the Israeli authority for development of weapons and military technology. One of Iddan’s projects was to develop the “eye” of a guided missile, which leads t
> In the global video game industry, the introduction of each generation of console has ushered in a new battle for market dominance. New entrants have made startling entrances and toppled seemingly invincible incumbents. Game developers, distributors, and
> What are some of the advantages and disadvantages of co-location? Are there some types of projects for which “virtual teams” are inappropriate?
> Can you identify an example of a development project and what type of team you believed they used? Do you think this was the appropriate type of team given the nature of the project?
> What are some of the ways that managers can ensure that a team reaps the advantages of diversity while not being thwarted by some of the challenges team diversity raises?
> Why are there tradeoffs in choosing a team's size and level of diversity?
> What kinds of people make good project champions? How can a firm ensure that it gets the benefits of championing while minimizing the risks?
> Are there some industries in which a parallel process would not be possible or effective?
> Consider a group project you have worked on at work or school. Did your group use mostly sequential or parallel processes?
> What are some of the advantages and disadvantages of a parallel development process? What obstacles might a firm face in attempting to adopt a parallel process?
> Is the Stage-Gate process consistent with suggestions that firms adopt parallel processes? What impact do you think using Stage-Gate processes would have on development cycle time and development costs?
> What factors do you believe influenced the choice of protection strategy used for the innovation identified above? Do you think the strategy was a good choice?
> What are some of the advantages and disadvantages of the transnational approach advocated by Bartlett and Ghoshal?
> Why is the tension between centralization and decentralization of R&D activities likely to be even greater for multinational firms than firms that compete in one national market?
> What factors should a firm take into account when deciding how centralized its R&D activities should be? Should firms employ both centralized and decentralized R&D activities?
> What are some of the advantages and disadvantages of having formalized procedures for improving the effectiveness or efficiency of innovation?
> Are there particular types of innovation activities for which large firms are likely to outperform small firms? Are there types for which small firms are likely to outperform large firms?
> Describe a technological innovation not discussed in the chapter, and identify where you think it lies on the control continuum between wholly proprietary and wholly open.
> Can you identify a situation in which none of the legal protection mechanisms discussed (patents, copyrights, trademarks, trade secrets) will prove useful?
> When will trade secrets be more useful than patents, copyrights or trademarks?
> Consider a firm that is considering marketing its innovation in multiple countries. What factors should this firm consider in formulating its protection strategy?
> What marketing strategies are used by the producers of the product you identified for question 3? What are the advantages and disadvantages of these marketing strategies?
> What are the differences between patents, copyrights, and trademarks?
> Are their some industries in which you would expect to see particularly short technology cycles? Are their some industries in which you would expect to see particularly long technology cycles? What might be some of the factors that influence the length o
> Will different methods of evaluating a project typically yield the same conclusions about whether to fund its development? Why or why not?
> If a firm decides it is in its best interest to collaborate on a development project, how would you recommend the firm go about choosing a partner, a collaboration mode, and governance structure for the relationship?
> What are some of the reasons that a firm might use both qualitative and quantitative assessments of a project?
> How does the mode of collaborating (e.g., strategic alliance, joint venture, licensing, outsourcing, collective research organization) influence the success of a collaboration?
> What are some of the advantages and disadvantages of collaborating on a development project?
> Identify a particular development project you are familiar with. What kinds of methods do you believe were used to assess the project? What kinds of methods do you believe should have been used to assess the project?
> For what kind of development projects might a real options approach be appropriate? For what kind of projects would it be inappropriate?
> What are the advantages and disadvantages of discounted cash flow methods such as NPV and IRR?
> Pick a product you feel you know well. What intermediaries do you think are used in bringing this product to market? What valuable services do you think these intermediaries provide?
> How is the idea of “strategic intent” different from models of strategy that emphasize achieving a fit between the firm’s strategies and its current strengths, weaknesses, opportunities and threats (SWOT)?
> What determines whether an industry is likely to have one or a few dominant designs?
> Why is it necessary to perform an external and internal analysis before the firm can identify its true core competencies?
> What makes an ability (or set of abilities) a core competency?
> What is the difference between a strength, a competitive advantage, and a sustainable competitive advantage?
