1. A worker values her leisure at $7 per hour. If she is unemployed she receives $9

Question

per hour in unemployment benefits. If she is hired to work on a public project
she will be paid $18 per hour (and will forfeit her unemployment benefit). What
is:
a. The social opportunity cost of an hour of her time (the cost which would be
entered in an efficiency benefit-cost analysis)? [1 mark]
b. The private opportunity cost of an hour of her time (the wage she would
have to be paid to induce her to accept a job)? [1 mark]
c. The total employment benefit per hour that would be entered in the
referent group net benefit account if she was employed on a public
project? [1 mark]
d. The division of the hourly employment benefit between the worker and the
government? [2 marks]

2. A foreign firm is considering a project in a developing country which has, at
market prices and before tax, a present value of benefits of $1,450 and a
present value of input costs of $955. If the project goes ahead, the firm would
pay tax of $97 (present value) to the developing country!¡¥s government. The
project would employ domestic labour which would otherwise be unemployed
and pay them wage with a present value of $715 (the wage bill is included in
the $955 input costs referred to above). The opportunity cost of unemployed
labour is 75% of the market wage. The project will create both negative
(pollution) and positive externalities (accumulation of new labour skills) to the
economy, which have present values of 345 and 128, respectively.
Assuming that the owners of the foreign firm are not part of the referent group,
what are the net present values generated by:
a. The project benefit-cost analysis; [1 mark]
b. The private benefit-cost analysis; [1 mark]
c. The efficiency benefit-cost analysis; [1 mark]
d. The aggregate referent group benefit-cost analysis; [1 mark]